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The fallout from FTX's collapse is being felt across the crypto industry

MARY LOUISE KELLY, HOST:

The fear is real that the spectacular collapse of the cryptocurrency exchange FTX will spread. Some other crypto companies have already paused customer withdrawals. They're filling up Twitter with reassurances that not everyone finds that reassuring. Joining us to talk about crypto contagion is NPR's David Gura. Hey, David.

DAVID GURA, BYLINE: Hey, Mary Louise.

KELLY: That's quite the mouthful, crypto contagion. What does it mean? What are you actually seeing right now when you look across the industry?

GURA: Well, there's this pervasive nervousness, and you can attribute that to how far FTX fell and how quickly. This was not an implosion a lot of people saw coming. So now they wonder if this happened to FTX, which had millions of customers, had this multibillion-dollar valuation, could it happen to other companies? In other words, maybe this isn't a one-off. You know, FTX's bankruptcy proceedings just got underway in Delaware. And during a hearing yesterday, a lawyer for the company said of FTX's founder and now former CEO Sam Bankman-Fried, it's clear the emperor had no clothes. And along those lines, Craig Erlam, who's a senior market analyst with the firm OANDA, told me he's been thinking about something the billionaire investor Warren Buffett is fond of saying.

CRAIG ERLAM: When the tide goes out, you see who's swimming naked. And I feel like this is a massive swimming naked moment for the cryptocurrency market.

GURA: Very vivid. I like that.

KELLY: Yeah.

GURA: So investors are scrutinizing a lot of these businesses, and they're also anxiously awaiting updates from many of them, especially from companies we know had ties to FTX.

KELLY: Like what? Who are those companies?

GURA: Well, first, let's talk about BlockFi. A few months ago, FTX was flying high. It was acting as kind of a lender of last resort to a lot of crypto companies that were having trouble weathering what's been a big downturn for crypto. One of those companies was BlockFi. FTX loaned it millions. Now BlockFi has paused client withdrawals, citing significant exposure to FTX. I'll note its press team told me BlockFi has options and it's going to, quote, "determine the best path forward." Genesis is another company to watch. The trading platform is also on bankruptcy watch, and it doesn't have a lending relationship with FTX, according to the company, but it's also in trouble. And that could raise the possibility that FTX's collapse is hurting the industry on a larger scale. It's not just hurting companies with direct ties to it. And Genesis has stopped originating new loans. A spokesperson for the company said its goal is to resolve the current situation without the need for any bankruptcy filing.

KELLY: Say I bought crypto, say I still own crypto, what is the takeaway for people as they watch and try to assess their risk here?

GURA: That there is a lot of risk, that this market is largely unregulated, that there's no investor protection. And according to OANDA's Craig Erlam, it's leading to more skepticism.

ERLAM: A situation like this begs the question, where else in the industry are these similar vulnerabilities, these similar dependencies, similar levels of negligence or corruption or anything like that?

GURA: Erlam told me it's made him appreciate anew the differences between the crypto market, which is still so young, and more mature markets like stocks and bonds, which of course have been around for much longer and have layers and layers of oversight.

KELLY: You know, we can probably both point to past examples where one market, one industry has had problems and the contagion spreads. Is there any sign - it's early days, but any sign that crypto contagion could spread to other markets?

GURA: So far, no. And this is the strongest argument against what a few people have said, that this is a Lehman moment; in other words, like what we saw before the big financial crisis more than a decade ago. Some firms that invested in FTX have written down those investments to zero, meaning they now see them as worthless. But the traditional financial ecosystem and the crypto ecosystem are still pretty discreet. And analysts have told me that if there is a silver lining to this story, Mary Louise, it's this - that because they're pretty separate, that's kept this contagion from spreading even more widely.

KELLY: That is NPR's David Gura reporting. Thank you, David. Happy Thanksgiving.

GURA: Thanks, Mary Louise, to you as well. Transcript provided by NPR, Copyright NPR.

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David Gura
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.
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