Following FTX and BlockFi Bankruptcies, Is Crypto.com Next?

Saying that it has been a difficult year for crypto would be quite an understatement. The Terra/Luna crash, Axie Infinity hack, Celsius collapse, Three Arrows Capital fiasco, and now the FTX controversy are enough to have anyone wondering about the future of crypto. With fears of contagion starting to mount up, we all are wondering what company will follow. With Crypto.com having been exposed to FTX, many believe that Crypto.com could be next.

The crypto market now sits under the $900 billion mark, something few would have predicted after a meteoric 2021 rise that saw the crypto market reach the $3 trillion mark. With crypto winter having extended way beyond what most investors predicted and the current panic spawning across the ecosystem, crypto companies are finding themselves trying to calm investors.

Low Liquidity Assets Might Be a Problem for Crypto.Com

Crypto.com, which has been the target of criticism over the past month, has found itself doing its best to assure investors of its platform’s liquidity. Concerns around Crypto.com’s liquidity stem from the platform’s reliance on low liquidity assets like Shiba Inu and CRO (its own token). With only 60% of all assets being in liquid coins like BTC/ETH/USDT/USDC/DAI/BUSD, investors were quick to take action. 

2.

5 Ethereum wallets and 6 BTC wallets of https://t.co/INIxikglp6 hold a total of $2.68B assets.

Including:
– 51,836 $BTC($857M)
– 58T $SHIB($531M)
– 364,969 $ETH($446M)
– 184M $USDT
– 88M $USDC
– 1.2B $CRO($80M)
… pic.twitter.com/QdQKkaGBZr

— Lookonchain (@lookonchain) November 13, 2022

Cronos (CRO), Crypto.com’s token, dropped in value significantly after FTX’s collapse. This took place as short CRO traders paid as much as 3% premiums to long traders, which according to UTXO Management Senior Analyst Dylan LeClair is “the exact same dynamic that occurred before Celsius and FTX collapsed.”

Crypto.com Executive Speaks

Concerns around the future of Crypto.com forced Chief Executive Officer Kris Marszalek to speak publicly about the fears. Taking questions via a YouTube live stream, Marszalek assured investors that the platform had enough reserves to match every user deposit. According to Marszalek:

“Our platform is performing business as usual. People are depositing, people are withdrawing, people are trading, and there’s pretty much normal activity just at a heightened level. We never engage as a company in any irresponsible lending practices, we never took any third-party risks. We do not run a hedge fund, we do not trade customers’ assets. We always had 1-to-1 reserves.”

Analysts have been quick to point out that while Crypto.com might not be a hedge fund, the platform’s reliance on third parties could be an additional source of risk for investors. In fact, Marszalek said that the platform had received $990 million from FTX and its exposure was limited to $10 million.

Marszalek also announced during the stream that the company would be publishing an audited proof of reserves within weeks and that the company would continue operating as usual. However, blockchain data shows that Crypto.com withdrew over $260 million USDT from Binance and Circle before the announcement, which has further raised the alarms in the crypto space. Binance CEO Changpeng Zhao tweeted in this regard:

If an exchange have to move large amounts of crypto before or after they demonstrate their wallet addresses, it is a clear sign of problems. Stay away. Stay #SAFU. 🙏

— CZ 🔶 Binance (@cz_binance) November 13, 2022

The Crypto.com Controversy Is Extending

While Crypto.com is yet to publish its proof-of-reserve audit, Binance has already started setting up a proof-of-reserves system that would allow anyone to check the company’s solvency. While well received by many investors, experts like Kraken’s CEO Jesse Powell were quick to point out the lack of information on liabilities. According to Powell, this renders the PoR pointless.

I’m sorry but no. This is not PoR. This is either ignorance or intentional misrepresentation.

The merkle tree is just hand wavey bullshit without an auditor to make sure you didn’t include accounts with negative balances. The statement of assets is pointless without liabilities. https://t.co/b5KSr2XKLB

— Jesse Powell (@jespow) November 25, 2022

Crypto.com has been widely criticized over the years for its reliance on expensive marketing campaigns, renaming of sports venues, and sponsorships. While these moves are certainly not an indication of future risk, they might not be enough for the company to ease concerns about its finances. The current controversy might very well represent a unique opportunity for Crypto.com to step up and show a different face to the platform.

With the entirety of the crypto world still waiting for the publishing of the proof of reserves, pressure is mounting on Crypto.com and other exchanges to become more transparent. While a short-term bankruptcy is highly unlikely for Crypto.com, more information and facts are needed to make a valid prediction of the platform’s future. For now, caution should be the law of crypto land.