Crypto Exchange FTX Bails Out Lending Platform BlockFi: What is a Bailout?

Crypto Exchange FTX Bails Out Lending Platform BlockFi: What is a Bailout?

This is FTX’s second bailout of a struggling digital asset company in as many weeks. We look at what happened and what exactly a bailout is.

What is a Bailout?

A bailout is an act of giving financial assistance to a failing business to avoid its collapse and is the last resort when all other attempts to save the company have failed. 

Central Banks usually carry out the procedure to rescue financial institutions deemed too big to fail. This was the case in 2008 when the Fed attempted to prevent the collapse of Bear Stearns by providing a $12.9 billion bridge loan for a merger with JPMorgan Chase (NYSE: JPM). 

That year, the Fed and Treasury Department also jointly provided $141.8 billion in assistance to AIG in exchange for a 92% stake.

Why did FTX bail out BlockFi?

Last Tuesday, the crypto-trading platform FTX tried to bolster the $900 billion crypto industry by extending a $250 million loan to BlockFi. The week prior, the same company rescued crypto broker Voyager Digital (OTC: VYGVF) with a loan totaling $485 million in cash and bitcoin. 

The bailouts by FTX have come when the crypto industry is trying to restore confidence as the prices of digital currencies plummet. Bitcoin has fallen 64% from its all-time high in November last year, while its rival — ether — has fallen by 71%. This has, in turn, pushed some larger market participants into distress. Coinbase Global, Inc. (NASDAQ: COIN) announced earlier in the month that it will lay off 18% of its staff.

As a result of these bailouts, FTX chief executive Sam Bankman-Fried was referred to as the “lender of last resort” for the crypto industry. Comparisons have been made between the industry and the financial sector during 2008, the main difference being that a private company is saving these failing businesses, not the central banks. 

While unusual, it does make sense for FTX to take up the role of a lender of last resort. Firstly, the company has a strong enough balance sheet to afford the huge expenses required in a bailout. 

Secondly, a large number of collapses in the industry could result in falling confidence in cryptocurrencies for an extended period. Therefore, it is understandable why FTX would save these companies and help the industry to survive and flourish. Bankman-Fried defended his position on Twitter yesterday, declaring  “I think that’s what’s healthy for the ecosystem, and I want to do what can help it grow and thrive.”

Read More