Collapse of Crypto Exchange FTX More Like Enron Than Lehman

The collapse of FTX and Alameda Research impacts the centralized finance (CeFi) part of the crypto industry the most, Bernstein said in a research report Monday. Part of the crypto ecosystem is exposed to this event, but it is not the entire industry, the report added.

The decentralized finance (DeFi) ecosystem and blockchain-based applications, “gain from this fragility, subject to some regulatory boundaries and negotiations,” analysts Gautam Chhugani and Manas Agrawal wrote. DeFi is an umbrella term for a variety of financial applications carried out on blockchains.

Bernstein says there needs to be a distinction made between the centralized custodial players in crypto, namely the exchanges, custodians, and crypto banks, as this is where regulation is coming. This will involve rules around maintaining reserves and uniform accounting for custodial firms, the broker said. Governments and regulators may also increase their scrutiny of offshore exchanges, where regulations are lighter, it added.

Binance market share is likely to increase following the FTX debacle, and Binance.com, which is offshore, is likely to continue along its arduous path of converting its exchange into a more onshore structure, the note said.

The broker sees a significant liquidity impact on the crypto market in coming weeks, which will hurt the smaller tokens.

“FTX feels closer to Enron than Lehman,” the report said. FTX was the third largest exchange with only a 10% market share, but the “noise it has created has been disproportionately more,” perhaps because of the profile of its founder Sam Bankman-Fried, who was hailed as the “genius industry savior.”

Enron and Lehman were two famous corporate collapses that occurred in TradFi in the years prior to the creation of the first cryptocurrency bitcoin (BTC) in 2009, and were the result of accounting scandals.

Echoing comments made by Wall Street rival Citi in a report last week, Bernstein says that decentralized exchanges (DEXs) continue to see traction, especially after the failure of FTX.

FTX’s failure could be the catalyst that forces the hand of regulators to accelerate regulation, the note added.