Citi Analyst Warns Risk of Broader Contagion to Crypto Ecosystem

Citi Analyst Warns Risk of Broader Contagion to Crypto Ecosystem

Citi analyst Joseph Ayoub has warned of the risk of broader contagion for the crypto ecosystem from the collapse of the crypto exchange FTX. He said the contagion "can last for a significant amount of time." He further added that the crypto industry seems to have "no significant lender of last resort."

Market Faces Risks of Repercussions to the FTX Implosion

Citi analyst Joseph Ayoub explained in an interview with CNBC on Friday that the cryptocurrency market faces risks of contagion from the implosion of FTX. The troubled crypto exchange filed for Chapter 11 bankruptcy on Friday. The Citi analyst cautioned:

"I think there’s a serious risk of broader contagion to the ecosystem itself."

However, he added: "It’s unlikely that contagion spreads toward broader financial markets, and that’s mainly because of the size of the crypto space, which is only around USD 830 billion in comparison to the USD 43 trillion US equity market."

Ayoub further predicted that companies in the crypto sector will face renewed distrust, but noted that it also provides an opportunity for other firms to move forward and capture more market share with the elimination of one of the biggest players.

"Within cryptocurrencies, it’s unclear as to how far and how deep this goes," the analyst said, elaborating:

"Contagion can last for a significant amount of time, and with the number of companies and the amount of investment involved with FTX, following Chapter 11, it could take a long time to resolve."

‘No Significant Lender of Last Resort’

The Citi analyst believes that the FTX crash differs from the 2008 financial crisis when the government stepped in with a massive cash injection and bailed out Wall Street. He opined:

"It almost seems ironic now that we were previously thinking that Sam Bankman-Fried and FTX were providing some sort of lender of last resort optionality... and now it seems there is no significant lender of last resort."

JPMorgan Chase’s analysts said last week that fewer players in the crypto space are now able to rescue weaker players. "The number of entities with stronger balance sheets, able to rescue those with low capital and high leverage, is shrinking."

Crypto exchange FTX filed for Chapter 11 bankruptcy on Friday. Before the bankruptcy filing, Binance was considering acquiring the rival crypto exchange. However, after performing due diligence, the company decided to walk away from the deal, citing reports of FTX mishandling customer funds and investigations by US authorities.

The space vacated by the second-biggest cryptocurrency exchange in the world could be an opportunity for other exchanges to step in but in a crisis, there seems no significant lender of last resort. Do you agree?