The fallout from the FTX bankruptcy is still unclear for the local crypto industry. While financial regulators are specifically knocking on players' doors, some providers are taking in millions, research shows.

After investors feverishly tried to withdraw assets from the teetering platform in recent days, fear of the consequences of the FTX bankruptcy is now driving the scene, including Switzerland. As it turns out, the specter of contagion worries players in Zug and Zurich less than the long-term impact of the debacle surrounding crypto guru Sam Bankman-Fried's one-time flagship firm.

«I believe that a lot of painstakingly built trust in the crypto and blockchain industry has been destroyed here,» pioneer of Zug's «Crypto Valley» and co-founder of blockchain consulting firm Inacta Ralf Glabischnig tells finews.asia. He fears that it will become harder for companies to raise capital and the current crypto winter could last longer.

1 Million Creditors

While the risk of contagion cannot be dismissed out of hand, the extent of the linkages between FTX and hedge fund Alameda Research, which is affiliated with the Bahamas exchange, is considerable. Together with the two companies, 134 other companies have filed for bankruptcy protection in the US, and FTX speaks of more than 1 million creditors in documents filed.

Alameda Research has been a venture capitalist to dozens of other startups, including Swiss crypto bank Seba.

On Monday, Seba rushed to contextualize its investment via Twitter. Alameda Research had held less than 1 percent in the company, and Seba had neither traded on the FTX platform nor invested in its tokens. Other local crypto providers are also trying to reassure their clientele.

Reduced Exposure

Mathias Imbach, CEO of crypto bank Sygnum, with headquarters in Zurich and Singapore, told finews.ch the company was not affected by the FTX insolvency and a possible industry contagion, and neither FTX nor Alameda Research invested in Sygnum. Moreover, it does not hold or trade FTT or Solana tokens, under severe pressure in the wake of the exchange's bankruptcy.

At Deutsche Borse subsidiary Crypto Finance, the crew has been busy the past few days. «Crypto Finance's business model involves holding liquidity at various crypto trading venues for trading purposes, including in the case of FTX,» says CEO and founder Jan Brzezek. Clearly defined limits apply to all trading venues, and «accordingly, our exposure is manageable as of today,» he explains. There are no customer deposits at FTX.

Reserves Disclosed

In recent days, foreign crypto exchanges have gone one step further than Swiss exponents by starting to disclose their balance sheets for external audits. With this «Proof of Reserves» (POR), they seek to assure their customers that deposited funds are safely stored. The POR is intended to ensure customer holdings are not misused and any cryptocurrencies held are backed by real assets.

Auditor reports are cryptographically matched to ensure privacy and security. While the process has many advantages, it cannot completely prevent possible misappropriation of client funds. It only tracks holdings and cannot prevent an exchange from lending money to dubious borrowers. Ultimately, a POR is a snapshot in time and only as good as its verifier.

The Shot That Backfired

Exchanges putting up POR dashboards following the FTX debacle include industry giants Binance, Coinbase, Kraken, OKX, Huobi, and Crypto.com, although the disclosure offensive has led to some confusion.

For Crypto.com, the shot backfired. According to a published wallet analysis, the company holds 20 percent of all reserves in the highly speculative Memecoin Shiba Inu, to the great astonishment of many market observers. This mirrors the customers' balances 1:1, it said. Crypto.com has so far managed to service all customer withdrawals from its reserves dispelling fears, for now, that it could falter next.

Asset Withdrawal

Following FTX's implosion, numerous investors withdrew their digital assets from central trading centers, putting them into «self-storage,» a trend being observed in Switzerland.

«We are seeing both clients who are withdrawing digital assets and storing them on their hardware and those who are now more than ever using the professional custody services of regulated players,» says Brzezek. He cautions, «those who store their crypto assets themselves should be well versed in the technology. We all know the stories of lost access codes.»

Sygnum's Imbach says the bank has not experienced an above-average outflow of customers looking at self-storage. Instead, Sygnum has seen significant inflows of 270 million Swiss francs since the beginning of November, a figure expected to rise to at least 400 million francs by the end of the month based on the confirmed inflow pipeline.

«Many of our existing clients are consolidating their assets, often from unregulated exchanges, with Sygnum,» says Imbach, explaining the flight.

Proactive Regulator

Switzerland has benefitted through all of this, having pushed crypto industry regulation over the past few years. While the FTX bust has been blamed on US financial regulators, firms directly subject to the Swiss Financial Market Supervisory Authority (Finma) are required to report their token and coin positions monthly. «I don't think similar incidents at large regulated Swiss players are very likely,» Brzezek says.

Finma has been proactive following the FTX debacle. «We are of course interested in whether the bankruptcy of the platform has any impact on companies we supervise,» a spokesperson said. Finma specifically asked individual institutions about their exposure, finding that «so far, we have no indications of serious exposures in the context of the FTX events.»

Historic Industry Moment

Professionals are in the dark when it comes to assessing the wider consequences of the debacle, not least because crypto asset prices continue to weaken, with even the most reputable players not immune from the fallout. The world's largest crypto fund, Grayscale Bitcoin Trust, is trading on the US stock market at a discount of over 40 percent to the bitcoin it holds, «Bloomberg» (behind paywall) reported Tuesday.

«The crypto industry is experiencing a historic moment,» said Marc Baumann, who started his own business after four years at Zug-based broker Bitcoin Suisse. What happened with FTX, he says, is something the industry has never experienced on this scale. «This should lead us to the awareness that we are now at a crossroads.»

Two camps are emerging. «One side favors stricter oversight and more rules to restore confidence in the industry,» Baumann says. Others point out that with FTX, a centralized exchange caused the debacle, leading to calls for more decentralization and a return to the original blockchain concept.

Safe Haven Switzerland

«The dichotomy between decentralized and centralized, between trust and trustless, is as old as the industry itself,» Baumann points out. It remains unclear in which direction it will go. «For regulated Swiss players, stricter supervision of the crypto universe would be positive,» the maintains.

Sygnum's Imbach shares this view. At the crypto bank, he said, it is assumed that FTX will have serious consequences for the industry worldwide, the effects of which are not yet foreseeable. «But it provides further opportunities for Switzerland to position itself as a safe haven for investors in uncertain times.»

Contributors: Samuel Gerber and Thomas Pentsy