SA's crypto exchanges dodge FTX collapse bullet

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 17 Nov 2022

While South African crypto-currency exchanges are reeling from the price drop in digital currencies following the spectacular collapse of FTX, the majority say they had no ties with the platform.

ITWeb asked several South African-based crypto-currency exchanges if they had been impacted by the crash of FTX, the world’s third-largest crypto trading platform.

This, after local exchange Ovex yesterday issued a statement, saying it had severed ties with FTX, which has since gone belly-up.

According to Ovex, FTX’s marketing activities in South Africa had in the past been regularised through its appointment as juristic representative of Ovex.

“Ovex confirms the cancellation and removal of FTX as juristic representative. The public is cautioned from doing further business with FTX, as FTX is not permitted to market its offshore derivatives products in South Africa, at this time,” says the company.

Founded by 30-year-old Sam Bankman-Fried, FTX is a Bahamas-based crypto-currency exchange. The exchange was founded in 2019 and, at its peak in 2021, had over one million users and was the third-largest crypto exchange by volume.

Citing people familiar with the matter, Reuters reports that at least $1 billion of customer funds have vanished from the collapsed crypto exchange, which has since filed for bankruptcy.

It says Bankman-Fried secretly transferred $10 billion of customer funds from FTX to his trading company Alameda Research, and a large portion of that total has since disappeared.

According to the Reuters report, FTX filed for bankruptcy on Friday after a rush of customer withdrawals. A rescue deal with rival exchange Binance fell through, precipitating crypto’s highest-profile collapse in recent years.

Bitcoin and Ethereum both fell about 6% following FTX’s Chapter 11 filing on Friday morning.

A step ahead

“Fortunately, AltCoinTrader had zero exposure to FTX, Alameda, Gemini or any of the multitude of companies related to the FTX Chapter 11 bankruptcy filing. No customer funds have been affected and it’s business as usual for us,” says David Porter, GM of AltCoinTrader.

“While we were unable to predict the third-largest crypto exchange in the world would file for bankruptcy, our broader market analysis and risk management teams highlighted potential issues months ago and AltCoinTrader took swift, appropriate action to ensure our customers’ funds were safe.”

Porter notes that the warning signs were there at the time, and AltCoinTrader stopped paying rewards on its Easy Save products for Bitcoin, Tether and Ethereum almost four months ago.

“We did this off the back of a risk assessment that determined AltCoinTrader should not trust third-parties with customer funds for the purpose of generating yields. Since July, we have only offered yield on TRON, ADA, MATIC and BNB.”

The reason for this is simple, he adds. “AltCoinTrader is able to stake these coins but also self-custody them, meaning we do not have to trust a third-party and we retain full control of the coins at near-zero risk. In essence, the chain associated with each of the coins would have to completely collapse for the coins to be at risk.”

According to Porter, there are a couple of lessons for centralised exchanges off the back of this collapse.

He notes the first is that there are degrees of risk associated with yield-generating products. “Risk increases dramatically where trust is placed in a third-party and assets have been re-hypothecated. Secondly, crypto firms should never ‘artificially’ increase their balance sheet through issuing their own token that is not appropriately backed or collateralised and then pump its value.”

In essence, Porter explains, FTX created a crypto-currency that helped destroy itself. “FTX created the FTT token in 2019 and it reached a value of about $60 last year, with about 250 million in circulation.

“Customers who bought FTT were able to execute trades on the company’s exchange at a discount. But the customers didn’t know those tens of millions of tokens weren’t widely distributed, which is key in having a market determine the price or value of any currency.

“In fact, a lot of FTT belonged to FTX itself and its affiliated companies, as well as the CEO’s hedge fund, Alameda Research. A large amount of the FTT token that was funnelled to Alameda was used to make speculative bets on other crypto-currencies and other more complex financial products. When the value of the FTT token plummeted, the whole stack of cards collapsed.”

Prioritising customer safety

Says Marius Reitz, GM for Africa of Luno: “Even prior to the collapse of FTX, Luno has been undertaking proof of reserves audits, which are released every quarter, that confirms we hold all crypto-currency on a 1:1 basis.

“Market events have not changed our approach, which has always been to build a safe platform for crypto investment with a total commitment to customer safety and transparent operations. In fact, recent events have only reinforced the importance of taking a responsible and long-term approach like ours at Luno.”

Nonetheless, Reitz says, the collapse has, of course, had repercussions across the market in South Africa and globally.

“It has further highlighted the vital importance of prioritising customer safety and security. Credible crypto exchanges undertake thorough due diligence and crypto-holders should also take steps of their own to verify that they are dealing with a credible exchange.”

Henco Vorstman, CEOof ChainEX, also says the local exchange has had no relationship or exposure to FTX or any of its affiliates or partners.

“ChainEX has not been affected by the collapse of FTX, as it does not use user funds for trading, lending or any other activities. We have seen, once again, that firms operating in the dark will be exposed sooner or later, no matter the size of the operation.

“We have also realised that regulation is desperately needed in the centralised space; the crypto industry will be better off for it, especially for clients that are not crypto experts who have no interest in self-custody or cold storage. These clients rely on centralised exchanges and they should be able to without fear of a collapse such as this one,” says Vorstman.

Similarly, Leon Kowalski, CEO of Cape Crypto, says the platform had zero exposure to the FTX collapse.

“Unlike other exchanges, we do not re-hypothecate customer funds,” he notes.