In The Eye Of The Storm - Crisis Management Playbook In Crypto's Lehman Brothers' Event

• Published date: 14 November 2022
• Subject Matter: Technology, Fin Tech
• Law Firm: Withers LLP
• Author: Mr Shaun Leong and Theodore Ang

Background

It all started in early November 2022 with a leaked balance sheet that revealed that the value of FTX CEO Sam Bankman-Fried's trading company, Alameda Research, was bolstered heavily by a token created by its sister company, FTX, and not by independent assets such as fiat currency or other cryptocurrencies.¹ The ensuing surge in withdrawals from FTX caused a liquidity crunch for the third-largest crypto exchange by trading volume, with US$6 billion of withdrawals made in just three days.²

The saga gained widespread attention after Binance's CEO, Changpeng Zhao (CZ) initially revealed on Twitter that Binance had reached a non-binding deal with FTX "to fully acquire http://FTX.com and help cover the liquidity crunch."³ Just one day later, Binance backed out of the deal following its due diligence. To add insult to injury, Binance disclosed on Twitter the existence of reports of "mishandled customer funds and alleged US agency investigations" and added that "the issues are beyond our control or ability to help".⁴

Bankman-Fried is now forced to face the full brunt of a public fallout. Against hopes that Binance's plan to bailout its fiercest rival would buy the crisis a little more time, Binance has decided to pull out just one day after announcing its plans. It remains to be seen what the impact of the fallout would be. There is also a real sense of contagion across the entire digital assets ecosystem, with many platforms finding themselves exposed. As Binance stated in its 10 November 2022 tweet, "we believe in time that outliers that misuse user funds will be weeded out by the free market." Platforms are under increased scrutiny on whether they have sufficient liquidity with concerns of facing a "bank run" like that suffered by FTX, while questions are being asked on whether proper due diligence were done prior to committing to exposures to FTX. With more players in the digital assets space expected to be called out in time to come, there has never been a better time for those hoping to survive the crypto winter to ask, "so, what do you do in a crisis like this?"

5 steps in crisis management

The first 72 hours of any crisis is the most critical time period. Decisions which are made in this period could mean the difference between putting down the fires early versus having to contend with an irreversibly viral situation after the window closes.

• The first step would invariably be to establish a crisis management committee. This would usually...