The Smarter Startup

FTX Scandal: Fact vs. Fiction

The FTX scandal and crypto winter will help differentiate crypto startups with scalable solutions, proper compliance, and financial discipline.

The FTX scandal has exacerbated an already difficult 2022 for the crypto industry. However, from where we sit as fractional CFOs for a large number of crypto startups, investors and founders alike should be careful not to throw the baby out with the bathwater.

Since its inception in 2009 – also during a time of macroeconomic upheaval – the crypto industry has been beset by a dizzying number of scandals, frauds, thefts, and blowups of various degrees and significance. Many of them were exogenous in nature, several were hacks, frauds, or internal failures, but virtually all raised loud concerns about the long-term viability of the sector – just like we’re hearing now. Yet if the past is prologue, the FTX scandal will not be the end of the crypto industry. On the contrary, it will continue crypto’s inexorable journey towards greater transparency, regulation, and innovation, all of which bode well for adoption of the technology.

…the latest crypto winter, which we were beginning to think was starting to thaw, has undoubtedly become colder

Burkland works with some of the best-known and most successful crypto and blockchain companies, and we have a window, financially at least, into the current mindset of this ecosystem. Yes, there will be a lot of real-world fallout from FTX, and the impacts will be felt both at the individual level as well as across the fintech ecosystem. In only a few days, the investment climate for crypto startups seeking new capital has chilled; the latest crypto winter, which we were beginning to think was starting to thaw, has undoubtedly become colder.

Ironically, however, the FTX scandal highlights one of the original, native benefits of crypto – decentralization. Any actor in crypto that centralizes digital assets – token exchanges, secondary NFT markets, staking platforms, etc. – is inherently undoing one of the core advantages of the technology. FTX is the latest example of the “not your keys, not your coins” lesson repeatedly learned since 2009…If anything, it underscores (again) the value of decentralized finance, or DeFi, that has proliferated across the fintech landscape and will continue to grab VC attention long after the dust has settled on FTX.

Ironically, however, the FTX scandal highlights one of the original, native benefits of crypto – decentralization.

Another observation – in prior years, a scandal of the scale and reach of FTX would have seen bitcoin’s price collapse on the news. This time, all things considered, the reaction has been relatively muted, particularly from institutions. We’re definitely not in the forecasting business, but as with any asset, greater liquidity & price discovery means less extreme market moves and more mature market participants. These factors bode well, eventually, for increased compartmentalization of unfortunate, yet isolated, incidents like FTX.

Finally, don’t forget that for many crypto startups, the events of this year have delivered some painful but necessary lessons. Much like the dot-com bust, the environment for startups without actual business models has become tenuous. Attracting funding, recruiting talent, and building a community on more than just FOMO and OpenSea will be harder for the foreseeable future.

Ultimately, the crypto winter in general, and the FTX scandal in particular, will help differentiate those crypto startups with bona fide business ideas, scalable solutions to real-world problems, proper compliance procedures, and financial discipline.

On the other hand, startups that have cared about and managed their finance function thoughtfully, with professional help from resources like Burkland’s fractional CFOs, will be far better positioned to survive than those that have neglected or minimized it. Ultimately, the crypto winter in general, and the FTX scandal in particular, will help differentiate those crypto startups with bona fide business ideas, scalable solutions to real-world problems, proper compliance procedures, and financial discipline.

The fallout from FTX will be wide and significant, but ultimately no more of a death knell for crypto than Pets.com was for Web 1.0, or Enron was for energy trading. For crypto VCs and founders alike, FTX is one of those bellwether events that seems fatal while it’s unfolding; in hindsight, it will be viewed as another institutional failure around which the necessary regulatory guardrails eventually emerge.