Sarah Kunst, managing director at VC firm Cleo Capital, joined Cheddar News to discuss the domino effect caused by the demise of cryptocurrency exchange FTX. "There will likely be more of those that get caught up in this contagion," Kunst said.

What You Need to Know as FTX Contagion Spreads

well the contagion from FT X. Is collapsed continuing to spread across the crypto space with block five, the latest domino to fall the crypto lender filing for bankruptcy citing exposure to F. T. X. As the nail in the coffin. The question now is how much farther will it spread? And what if anything can be done to prevent something like this from happening again? Well I'm joined now by sara coons managing director at the VC firm Cleo Capital Sarah. It's great to have you on the show and such an important topic. So my first question to you is just how dire is it out there in the crypto space? I think there's sort of two very separate problems. On one hand you have companies like F. T. X. That you know, it turns out there is a massive amount of poor governance, there was poor, possibly criminal accounting and commingling of funds. Those companies are in a terrible place and they probably deserve to be um there are companies like Black Fi that had so much exposure to company like F. T. X. That you know they're having to declare bankruptcy even though it doesn't appear that they did anything wrong. And then there's sort of the rest of the crypto world right companies like coin base that have seen their stock price go way down. Um And it doesn't feel like anyone's fleeing to them as sort of a safe harbor in crypto, it feels like right now a lot of people just don't want to touch crypto at all. Yeah I think that's a good point. Um And certainly we've seen this play out I think in some respects over the past year, right? It was just a year ago november of 2021 that the Cryptocurrency space had peaked just shy of 70,000 on Bitcoin. This collapse has clearly been building and we're at a new trough here. And so do you anticipate sarah that we could see more crypto companies more crypto assets fall as contagion may spread certainly. Um I think that you're going to see that that companies that have a lot of crypto lending exposure because they're not required by the government to have some of the cash buffers that the bank would, that's doing lending. Um you know, a traditional bank that, that there will likely be more of those that get caught up in this contagion. Um you know, we've seen names like Celsius and Voyager in july now block fi, you know, so there are a lot of companies that will have these problems. Companies with a lot of crypto exposure like coin base, you know, are seeing that, that nobody wants to buy them right now. It'll be interesting to see if that, you know, expands to companies like block like Robin Hood that that have less crypto exposure but are certainly crypto aligned. Um and and then, you know, I think that there's also going to be a lot of individual cryptocurrencies that do struggle with this, that maybe had shaky fun fundamentals to begin with. Um You know we're seeing some deflation of of sort of you know ethereum. Bitcoin prices. We're seeing those trend down but certainly not the all out collapse that you might have assumed. And I think that's in large part because the problems in crypto all the way back to the collapse and and sort of ransacking of Mt. Gox to F. T. X. It's not generally the fault, it's the fault of the human actors around the table who are either doing criminal things are just really really dumb things. So here's a question for you, sarah obviously the Cryptocurrency world is hardly regulated at all. Um If there is any regulation to even site here we see the stock market heavily regulated has been for decades. It's why many americans do trust putting their money into rich retirement accounts and brokerage accounts and other things. But if people are interested investing in crypto knowing that there is not the government regulation overseeing it to the same extent as the stock market, what are just some basic things that investors americans should know about how much of their money is at stake, how much risk there is on the line if they do decide to invest in the space. Yeah. I mean the sec and the C. T. F. C. Have been fighting over jurisdiction of crypto for way too long now and the retail investors are the ones that are getting hurt by it. You know, F. T. X. The vast majority of their business was outside of the U. S. That's why they were based in the Bahamas. But you know we don't have enough regulation in crypto in the US either. And hopefully this is a watershed moment where it becomes clear that we need to get regulation to protect these investors. But you know as there we like to say in the crib space, you know not your keys, not your crypto right? So you you want to make sure that if you are buying Cryptocurrency you're storing it somewhere that's holding full reserves 1 to 1. They're not lending out your money without your without your knowledge. Um And that you're you're working with an exchange like a gemini like a coin base that has a long history of trust with people and that has been very open to regulation and open about how they store your currency or store it in cold storage which mean that you know you keep those keys somewhere so that you're the only person who has access to your storage to your Bitcoin. You just want to make sure you don't accidentally throw it away. Um But you know those are the important things retail investors need to know that like any investment it can go to zero but you know you want to avoid bad actors. So I guess my question is Sarah what's next um in this F. T. X. Fallout? Right? Block fi just the latest company to file for bankruptcy, do we see more bankruptcies down the road? Is it that we finally get more regulation? What do you see playing out down the road? Certainly you know it's going to be winter and crypto for a while. It's going to take a while for crypto to earn back trust. A lot of platforms are going to have to be a lot more transparent about what they're doing with the crypto they're managing. Um I think certainly crypto lend is going to take a big hit because that's been sort of the cause of a lot of these problems. Um And I think a lot of it also will shake out in terms of does the world decide that F. T. X. Was doing something criminal or did they decide they were just a little bit negligent? Um I think that people want to see some accountability here from these big platforms that have lost billions upon billions of people's money. Yeah it is, it's a sad story. Right? Um And obviously an important story to tell as well. Sarah, we appreciate you lending your voice here on channel News and Closing Bell that Sarah Coombs managing director at VC firm Cleo Capital