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Crypto Craze Caveats Continue

FILE: Souvenir tokens representing cryptocurrency networks Bitcoin, Ethereum, Dogecoin and Ripple plunge into water. Taken May 17, 2022

With cryptocurrency exchange FTX declaring bankruptcy Friday, some investors are beginning to question the viability of a sector already bruised by the bitcoin bubble bursting and closures of key market players.

Crypto markets have come under intense pressure this year, as rising interest rates prompt investors to ditch risky or speculative assets.

The collapse of several crypto lenders, including Celsius and Voyager, major tokens terraUSD and Luna, and hedge fund Three Arrows Capital, had rung alarm bells even before the bankruptcy at FTX, where chief Sam Bankman-Fried has resigned.

During the past week, he was searching for financing to prop up his embattled crypto exchange, according to a Slack message to FTX staff seen by Reuters, after rival Binance scrapped a proposed bailout following a review of the company's structure and books.

Some in the industry note rising concerns over patchy oversight and counterparty risk beginning to overwhelm likely returns from the asset class, at least in the near-to-medium term.

FTX's swift fall from grace followed heavy speculation about its financial health that triggered $6 billion of withdrawals in just 72 hours during the past week. The company had published a valuation of $32 billion as recently as January.

"From a financial side, it's fair to say that confidence is going to be somewhat shaken because if you can't trust FTX then what can you trust?" Yat Siu, co-founder of Hong Kong-based investor Animoca Brands, told Reuters on Wednesday before the bankruptcy announcement.

Speaking at the Token2049 crypto conference in London on Wednesday, Andrei Kazantsev, global head of crypto trading at Goldman Sachs said "counterparty risk is starting to be top of mind" for some clients once drawn to crypto trading by high volatility and yield.

Unlike traditional corporations and financial firms, crypto entities operate in a regulatory gray area. For instance, deposits at crypto lenders are not insured by the government.