Can Switzerland benefit from the FTX crypto crash?

FTX once had the spending power to gain marketing rights for the venue where the Miami Heat basketball team plays. Copyright 2022 The Associated Press. All Rights Reserved.

The cryptocurrency sector is facing an unprecedented catastrophe with the collapse of the once-mighty FTX crypto exchange.

Swiss companies are on a knife-edge, torn between the inevitability of short-term business losses and the prospect of Switzerland emerging from the crisis as an even stronger global hub for the blockchain industry.

The Bahamas-based FTX group was until recently viewed as one of the most stable and innovative cryptocurrency companies in the world. It combined the world’s second largest crypto exchange with a highly profitable investment business, called Alameda Research.

The group has now filed for bankruptcy in the United States and is under investigation for suspected fraud in numerous countries. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information,” the company’s liquidator, who also handled the liquidation of Enron, stated in US court filings.

Tip of the iceberg

The ripple effects of FTX’s implosion are bound to be felt in Switzerland, but the real damage won’t be known for some weeks. The industry is bracing itself for falling trading volumes, less venture capital investment, further potential bankruptcies of firms with business links to FTX and reduced risk appetite from the traditional financial sector for cryptocurrencies.

“This is probably just the tip of the iceberg,” Michael Guzik, CEO of Swiss crypto lending platform CLST, told SWI swissinfo.ch. “Trust in the market is completely lost. Even the most sophisticated crypto players are now saying they are done.”

“It’s difficult to evaluate the seriousness of FTX contagion to the Swiss crypto space,” said Sygnum bank’s Chief Clients Officer Martin Burgherr. “We expect this to be serious for the industry globally with significant further cascading effects yet to come to light.”

Several Swiss crypto companies, including Bitcoin Suisse, Digital Finance, 21Shares, Sygnum and SEBA banks, have issued statements saying they are not in danger of being dragged down by the collapsed FTX.

Bitcoin Suisse said a “marginal amount” of its funds are trapped on the frozen FTX exchange, but not enough to materially affect its financial health. FTX’s daughter company Alameda Research had invested in SEBA, but the bank says this stake is less than 1% and did not come with voting rights.

Frozen funds

Crypto Consulting, which manages funds linked to cryptocurrencies, said investors had some assets trapped on FTX with no clear indication of how or when these assets can be recovered.

The FTX group had this year started building up its Swiss operations, starting with the takeover of a Swiss law firm that specialised in cryptocurrencies. The intention was to make Switzerland the headquarters for its European and Middle East operations.

Executives in charge of this business unit have now amended their social media profiles to distance themselves from FTX and did not respond to calls from swissinfo.ch for comment.

But Switzerland, which markets itself to the world as ‘Crypto Nation’, hopes to see some long-term benefits from the FTX debacle. The industry will probably need to come out of the shadows of opaque offshore havens and move to more respectable countries with a stronger tradition of regulatory oversight.

“Offshore jurisdictions are losing their attraction,” Ralf Kubli, board member of the Casper Association, told swissinfo.ch. “Institutional clients who care about their reputation will not want to do business with companies set up there.”

Flight to safety

“[The FTX crash] provides Switzerland with further opportunities to position itself as a safe haven for investors in uncertain times,” said Sygnum’s Martin Burgherr. 

The bank says it onboarded CHF345 million ($363 million) in new client assets so far this month, which are escaping volatility. That figure is forecast to reach CHF400 million by the end of November.

Switzerland has already amended its corporate and financial laws to accommodate blockchain-based finance while the country’s regulator is long accustomed to the nuances of cryptocurrencies.

This is what prompted another tarnished crypto exchange, BitMEX, to consider moving from the Seychelles to Switzerland, following its mauling by United States prosecutors.  

“Regulation is necessary to avoid the alleged malicious and criminal activity that has been witnessed at a large scale and at several instances,” wrote Crypto Finance in a report into the FTX debacle.

The collapse of FTX

FTX and its founder Sam Bankman-Fried were until recently considered to be among the hottest properties in the world of cryptocurrencies.

The Bahamas-based FTX Group was valued at $32 billion, including the world’s second largest crypto exchange and investment unit Alameda Research.

On November 2, a media report finds serious hidden deficiencies in the group’s finances. A few days later, rival exchange Binance sells it stockpile of FTX digital tokens (which underpins Alameda loans and facilitates trading on the FTX exchange), crashing their price.

As FTX struggled to deal the fallout, Binance offered to buy its rival and then withdrew from the proposed deal.

On November 11, FTX files for bankruptcy protection in the US. Several countries start investigating FTX activities.

The company appears to be hacked with a large sum of money moved to a different account.

The liquidator appointed to wind down the company describes the situation at FTX as “a complete failure of corporate controls and such a complete absence of trustworthy financial information”.