TheChek News Flow

Crypto asset providers are ‘animals with whom it is difficult to engage’, says chair of bank’s supervisory board

The European Central Bank’s head of financial supervision has warned regulators will struggle to oversee crypto asset providers, which “never think about financial risks”, do not respect national borders and pose “a huge consumer protection issue”.

Andrea Enria, chair of the ECB’s supervisory board, told the Financial Times: “I am concerned for my colleagues that will have to perform this supervision in the future because these are animals with whom it is difficult to engage.”

Global regulators have been scrambling to respond to the collapse of crypto exchange FTX, which filed for bankruptcy in the US on Friday after failing to fill an $8bn funding shortfall and leaving customers around the world facing heavy losses.

FTX’s collapse has delivered a powerful blow to a crypto industry already reeling from a string of failures in the sector this year, including the TerraUSD stablecoin and crypto lenders Celsius Network and Voyager Digital.

The EU is finalising legislation to bring crypto asset providers under a regulatory framework for the first time, known as Markets in Crypto-Assets, which will replace a patchwork of national rules. Enria said he was proud that the EU was the first jurisdiction to “bring these entities under some form of supervision” but predicted it would be an “interesting challenge”.

“When you’re talking about risk management with them, they have a different mindset,” he told the FT at a Dutch central bank event last week. “They think of IT security only; they never think about financial risks, so I don’t know how our toolbox will work with these types of animals.”

One of the biggest problems confronting regulators was the difficulty in pinning down where many crypto asset providers were based, Enria added. “Our tools are focused on legal entities and on territories,” he said. “Both issues with these crypto asset providers are not there.”

FTX’s public disclosures have revealed a multi-jurisdictional web of wholly owned subsidiaries and intercompany loans including entities in the Bahamas, Cayman Islands, Antigua and Barbuda, as well as the US, Japan, Germany and Switzerland.

In Europe, FTX secured a licence to operate as a Cyprus investment firm in September after acquiring a Cypriot rival K-DNA Financial Services that allowed it to operate across the EU, but the local regulator suspended this authorisation on Friday.

FTX’s main rival Binance eschewed having any identifiable headquarters for years, but it recently secured oversight in several jurisdictions including a registration in France and a licence in Dubai.

Enria said one leading crypto asset provider had threatened to route more of its European customers’ trading via its offshore entities if incoming EU regulation tried to force it to provide much more euro-denominated issuance.

“They said ‘This is unreasonable, it should be changed. But, eventually, if you don’t change, we will provide European customers with the same type of dollar-denominated assets via the internet through our shop in some other jurisdictions’,” he said. “It will be very difficult to police these types of requirements.”

The crypto market is “still not big enough to really generate a financial stability concern right now”, Enria said, but he added that “banks will need to engage in some way or another” with the crypto world.

He added: “The investments which are most exposed to these kinds of providers of crypto assets are the weakest parts of the population; the less wealthy, the poorer, the minorities. That is a concern, that is an important challenge for the consumer protection authorities.”

French luxury group Kering has hired a senior Estée Lauder executive to lead the creation of its beauty unit from scratch, Miss Tweed has learned. The new venture, about which Kering has said little until now, represents a sizeable source of potential growth for the group and would boost its valuation in the medium-to-long term if successful, analysts forecast.

Kering’s poaching from Estée Lauder Companies comes as the French group is trying to reach an agreement with the U.S. cosmetics company on how long it is prepared to let it exploit the Tom Ford beauty license if it wins the bid for the luxury brand. Kering is only really interested in the eyewear business, while Estee Lauder Companies, also in the race, just wants the cosmetics license.

However, it is the whole company that is for sale and that includes the lossmaking ready-to-wear business and the watch license as well. Goldman Sachs, which is advising Tom Ford, will not allow buyers to snap up just one division, industry sources said. As Miss Tweed reported last week, the two rival groups want the world to believe they are competing for the U.S. brand.

Behind the scenes they are trying to reach a deal for the Tom Ford beauty license, according to those sources. With Tom Ford, Estée Lauder Companies has built a significant perfume and make-up business, generating some $500 million to $600 million in annual turnover for the U.S. company at wholesale prices, industry sources say.

Kering has hired Raffaella Cornaggia who has worked 14 years for Estée Lauder Companies. Her last position, which she left before the summer, was senior VP and general manager of the international business of the Estée Lauder and Aerin brands, according to her LinkedIn profile. Previously she worked for Chanel, L’Oréal and Danone. Because of a non-competition clause in her contract, she cannot start working for Kering before early January, several sources with first-hand of knowledge of the matter said. For this reason, Kering cannot announce anything for now, they said. Cornaggia and the French group declined to comment for this report.

Kering has been thinking of entering the beauty business for several years, industry sources say. “Kering has been talking about it to dozens of consultants,” one industry source said. “I know, I am one of them.” The French group said at its half-year results in July “beauty is definitely an area where we could contemplate some initiatives in the future and all options are open”. It would not provide a concrete timeline or plan of action.

Kering would only say that the success of its eyewear division demonstrated that it could “create a lot of value” for its brands and beauty was a natural extension of its “brands’ territory”. Launched in 2015, the group’s eyewear business generates more than €1 billion in annual sales and it is aiming to increase that to €2 billion in the medium term. The division was built mainly through acquisition and investment in existing eyewear production facilities. The same is likely to happen for beauty.

However, unlike for eyewear and fashion, it is not critical to own production facilities. “Beauty is mainly a marketing, innovation and texture game – it is not like fashion or eyewear,” the former CEO of a major beauty group told Miss Tweed.

Many major beauty companies including L’Oréal, Coty and Estée Lauder Companies have their own production plants but also rely on third-party producers. One of them is Italian leader Intercos, which works with all three groups and others. There are many other high-quality and competitive suppliers in South Korea, Italy, France and eastern Europe. Intercos produces Gucci’s make-up on behalf of Coty.

Kering will likely want to work with them first before investing in its own plant, insiders forecast. The beauty business may be a natural evolution of fashion, just like eyewear, but it has little in common with these two sectors actually. The creative profiles, the business dynamics and the distribution networks and channels for beauty brands are radically different from those for fashion and eyewear. However, as in fashion and eyewear, size is also of the essence.

Some industry insiders believe Kering has no choice. It will need to acquire a well-established beauty company if it is serious about creating a new division. “It would give them an existing structure and professionals in the business but more importantly, it would help them win time and grow in size quickly,” another former beauty CEO said. The group has a strong balance sheet with a significant cash pile it could spend on making acquisitions.

Targets include Paris-listed Interparfums, which already works for the jeweler Boucheron, one of Kering’s brands, on top of Moncler, Ferragamo and Karl Lagerfeld among others. In 2021, Interparfums made a net profit of €71.1 million on turnover of €561 million. By last Friday, the company has a market capitalization of €2.84 billion. Its shares were down 25 percent since January.

Kering may also consider other targets to acquire expertise and know-how quickly. For now, the French group does not have that many brands with which it can build a sizeable fragrance and cosmetics division. It has Bottega Veneta, Alexander McQueen and Balenciaga which are free to be exploited since it did not renew the license with Coty for these brands. “But that is not enough to get that business going,” the former beauty executive said. “You need to have many brands and big ones too to be able negotiate with distributors such as Sephora, Douglas, etc.”

Balenciaga represents a huge missed opportunity for Kering, industry observers say. It has been one of the group’s fastest growing brands and a social media sensation. Had Kering sold its fragrance and beauty license to a major player like L’Oréal or Estée Lauder Companies, it would have generated at least €200 million in revenues in the past two to three years and paid handsome royalties to Kering, they say.

In 2019, the French group signed a license deal with France’s Lalique for its Brioni menswear brand which it has been trying to develop as best it can by stepping up investment in it, as Miss Tweed reported in April. Kering can get the license back in 2024. However, that fragrance business is tiny, industry sources say.

Earlier this year, Kering was among bidders alongside L’Oréal to acquire Byredo. In the end, Spain’s Puig won it, partly because it could justify paying a higher price due to the synergies it could create with its other beauty brands. “Thank God Kering did not win Byredo as it would have struggled to develop it on its own,” the former beauty CEO said.

Kering has made no secret of its frustration with the way Coty has been developing Gucci’s fragrance and make-up lines. Coty’s Gucci license, which it has been exploiting since 2016, still runs for another four-to-five years. It is estimated to generate around $450-$500 million in annual revenue, which is way below Kering’s expectations considering the brand has been one of the fashion industry’s biggest successes in the past seven years.

Gucci’s beauty business is a fraction of Dior’s, which generates in annual sales some $3.2 billion, analyst estimate. To be fair, Dior has been in the beauty business for decades and parent LVMH owns its own production facilities and many of the brand’s distribution channels.

There is no recent example of a fashion brand that has successfully brought its fragrance and perfume business in-house. Everyone remembers that when Burberry bought back its beauty business from Interparfums in 2012, it proved a disaster. It was too small to survive on its own and Burberry made the mistake of believing that it knew how to run a beauty company. Also, it had not hired enough experienced professionals from the sector to help run the new venture. Four years later, the British fashion brand sold the license to Coty.

Starting this year, Dolce & Gabbana has been working on bringing in-house its perfume and cosmetics business which it had previously licensed to Japan’s Shiseido. The privately owned Italian fashion house recruited Gianluca Toniolo, who used to work at LVMH’s travel retail division, as CEO of its beauty unit. It also hired other executives from LVMH and Coty. “At least these people know the beauty industry, so let’s see how D&G pulls it off,” one senior industry source said. Intercos is one of D&G’s manufacturers for make-up and fragrance.

If Kering wins Tom Ford’s eyewear license, which has been in the hands of Italy’s Marcolin since 2005, it will have three options. It can it let run its course until Dec. 31, 2029. It can buy it back before that deadline which would involve paying penalties to compensate Marcolin for lost business. Lastly, it could buy the company. Marcolin produces more than 2 million Tom Ford glasses and sunglasses. It is not clear if Kering’s existing production facilities in Italy, or those that it acquired in the United States thanks to the Hawaiian brand Maui Jim it took on this year, will be enough.

In 2022, Marcolin is expected to make annual sales of €530 million, of which some 52 percent, or around €280 million, will come from Tom Ford eyewear, a source close to the company told Miss Tweed on condition of anonymity. Marcolin pays Tom Ford royalties equal to 10 percent of the brand’s annual turnover. Last year, the designer’s two companies, his personal one and Tom Ford International, received €24 million in royalties from Marcolin and in 2022, that should be €28 million, the source said.

Marcolin’s controlling shareholder, the private equity firm PAI Partners has been trying to sell the company for some time. It has explored merger options with several players including Italian rival Safilo, industry sources said. Earlier this year, it came close to selling the business to U.S. eyewear producer Marchon but the deal was derailed by the news that Tom Ford was putting itself up for sale, as Miss Tweed reported in July.

Since Marcolin is expecting to make an Ebitda of around €60 million, if you apply a multiple of around 15, you get a valuation of some €900 million. It could make sense for Kering to acquire the company to ramp up its production capacity quickly. Marcolin produces eyewear for many other brands including Moncler, Adidas, Tod’s and Ermenegildo Zegna. No doubt PAI Partners is trying to persuade Kering CEO and controlling shareholder, François-Henri Pinault, the match makes sense.

Another party involved in the current discussions is the U.S. brand management firm Bedrock Manufacturing Company, which owns the license to produce Tom Ford watches in Switzerland.

It is the parent company of watch brand Shinola Detroit, founded by American Greek entrepreneur Tom Kartsotis, who started Fossil watches in the 1980s.

Tom Ford rose to fame by doing an excellent job revamping Gucci in the 1990s. He put the brand back on the fashion map. “If Kering bought Tom Ford, it would be like coming home,” one senior industry source said. The 61-year-old designer was chairman of the Council of Fashion Designers of America (CFDA) until March. Now he is now more into making films than designing clothes. However, he remains a marketing genius.

“Reveal your most glamorous and inspirational self,” Tom Ford says about his beauty line on the website of Estée Lauder Companies. “Amplify your individuality and show the world who you are, with maximum impact.” Kering would be better off having him on board than not. Buying Tom Ford opens up a whole new chapter for the French group.

Cover Story:
-“In putting our clients’ money to work in companies like Tricolor Auto Group, we’re helping more people gain access to affordable transportation and build a better life,” BlackRock says on its website. Dallas-based Tricolor, which gets its name from the three-toned Mexican flag, is little known outside the Spanish-speaking communities it serves in Texas and California, its biggest markets. But some clients say that being a Tricolor customer hasn’t made their lives any better, noting that just months after buying a vehicle, these fail, causing a cascading series of problems.

Interview:
-This week, Barron’s interviews Ray Dalio. Dalio is stepping down at a time when Bridgewater’s flagship Pure Alpha fund is riding high—it gained more than 22% this year through Oct. 31—but the world is feeling low. After years of loose monetary and fiscal policies and debt-fueled growth, many nations are grappling with rampant inflation, and central bankers are raising interest rates to cool price gains. Higher rates, in turn, have clobbered stock and bond markets, and threaten to tip major economies into recession next year. Meanwhile, in the US, the population is highly polarized, while external conflicts among superpowers threaten to put an end to decades of relative peace.

Tech Trader:
Some of the biggest winners of the midterm elections are the big tech companies. That’s because, in the midst of the election news, California Proposition 30 (a measure that would have raised tax rates on the state’s millionaires to subsidize the purchase of electric cars, shore up the state’s charging infrastructure, and provide some extra cash for firefighting in a state at constant risk of firestorm) was scrapped. Prop 30 was thrashed by a 3-to-2 margin, despite the backing of the Democratic Party, environmentalists, EV advocates, unions, and firefighters.

The Trader:
-Investors finally got the inflation reading they were looking for, and are likely to get a split government for the next two years. That combination propelled stocks to their best weekly showing since June. The S&P ended the week 5.9% higher, closing just below 4,000. The Dow Jones Industrial Average rose 4.1%, and the NASDAQ jumped 8.1% - its best weekly showing since March, and it came during a week when tech news seemed largely negative as META Platforms announced that it would cut 11,000 jobs, the latest in a wave of Silicon Valley layoffs. The best thing Facebook can say for itself now is that it isn’t Twitter.
-Oil prices have been steady in November, holding around $90 per barrel. But, there’s a good chance the calm won’t last. A new set of sanctions from Europe will ratchet up the pressure against Russia and could upend oil markets around the world.

Citi, which has had one of the lowest price targets for oil among the major banks this year, now sees higher prices ahead, with oil averaging $97/bbl in the fourth quarter, and $95 in the first quarter of 2023. Others are eyeing even higher levels, with some options traders making a long shot bet that crude could get to $200 by March 2023. That almost certainly won’t happen—it would take simultaneous supply and demand shocks to do it—but it does show just how much sentiment has shifted.

Features:
-It’s been a tough year for Bumble. Its shares have dropped 34% over the past 12 months, more than two times the S&P 500’s 14% decline. The problems continued this past week when Bumble missed sales expectations for its fiscal third quarter. Bumble has been getting the cold shoulder from investors, who are worried that singles have cooled on its dating apps. The company, though scruffy, remains attractive—and its stock could be just the ticket for investors looking for more than a quick hookup.
-As interest in crypto and crypto exchanges exploded in recent years, more high profile individuals like professional athletes and other entertainment personalities joined financial institutions in investing in FTX. One of those athletes is Tampa Bay Buccaneers quarterback Tom Brady. Just a few months after winning his seventh Super Bowl in 2021, Brady and his then-wife Gisele Bündchen were each given equity stake in FTX, in addition to receiving some crypto. Brady served as an ambassador for the company and Bündchen was FTX’s Environmental & Social Initiatives Advisor. A similar story can be told for Steph Curry of the NBA champion Golden State Warriors, who was made a global ambassador for FTX and also given an equity stake in the company in 2021.

European Trader:
-Italy’s new Prime Minister Giorgia Meloni and her government are facing an economic downturn that could determine trigger a deep recession. The Eurozone’s third-largest economy isn’t alone in battling soaring inflation, an energy crisis, and the region’s highest benchmark interest rate since 2009. However, its huge debt burden poses problems for the newly elected government and for the wider economic stability of Europe. Italy’s debt rose to 150.8% of gross domestic product in 2021, second only to Greece among euro zone countries and one of the largest in the world.
In her first speech to lawmakers, Meloni criticized the European Central Bank’s latest interest-rate hike, saying it could reduce banking credit. The central bank raised Europe’s benchmark rate by 0.75 percentage points late last month and signaled further hikes ahead. The pressure on Meloni eased somewhat as Italy’s economy unexpectedly grew 0.5% in the third quarter, Germany’s 0.3%. But, the growth spurt could be only temporary. “We continue to expect a technical recession to occur at the turn of the year, with Italy remaining particularly vulnerable to the impact of Europe’s energy crisis,” says Loredana Federico, chief economist at UniCredit. With a recession seen as largely inevitable, Italian stocks are best avoided, for the most part.

Emerging Markets:
-Calls for so-called “climate justice”—developed nations helping emerging markets pay for destruction and adaptation—are dominating the annual global green summit known as COP27. The rich world promised $100B/year for this purpose back in 2008, and never delivered. A pilot plan of sorts, the Just Energy Transition Partnership, may give us a clue about the next 14 years. JETPs, as climate insiders call them, target coal-fired power plants, which are the top source of greenhouse gases globally, out-polluting even oil-burning vehicles. They’ve got battle-scarred climate warriors venturing a bit of optimism.
“These JETPs are a really important step forward in emissions reduction in some of the biggest countries of the world,” says Jake Schmidt, director for international climate at the Natural Resources Defense Council.

Commodities:
-Risks to global demand contributed to a decline in copper prices this year. But the value of the industrial metal may have fallen too far, as supplies look to remain tight for another decade or more. Visible copper inventories at exchanges globally continue to fall, following a “yearslong downtrend,” says Robert Ryan, chief commodity and energy strategist at BCA Research. Yet the copper market is also facing a global shortage, he says, with the “biggest impediment” to addressing these physical shortages being a lack of capital expenditure to boost supply. “That’s a chronic problem for copper,” he adds.

Streetwise:
-This week’s Streetwise Podcast Jack Hough looks at crypto-exchanges, and FTX specifically. FTX becomes the latest crypto exchange to bite to dust. Plus, job cuts in tech bleed into other sectors?

The European Union will need up to $462 billion (450 billion euros) in investment just to keep the current level of its nuclear power generation capacity, the EU Commissioner for Energy, Kadri Simson, said at a nuclear energy forum this week.

Nuclear power will have an important role to play in the EU’s climate targets of low-carbon electricity generation, Simson said at the European Nuclear Energy Forum in Prague.

“The backbone of the future European carbon free power system will be predominantly renewables. But the reality is that these renewables will need to be complemented with a stable baseload electricity production. This is why nuclear energy is not just a safety and security concern, but also a real solution,” she added.

This year, a year when surging energy prices have highlighted the importance of energy security, the EU is particularly focused on its nuclear power availability.

According to the EU modeling, nuclear power generation will account for around 15%-16% of the EU’s power output in 2030 and 2050, Simson said.

The EU needs a stable generation capacity, at the level of just over 100 GW, in the coming decades. Yet, a lot of investment will be needed to keep that generation capacity in the future.

“Our analysis shows that without immediate investment, around 90% of existing reactors would be shut down around the time when we need them most – in 2030,” Simson noted.

The EU will need between $360 billion (350 billion euros) and $462 billion (450 billion euros) of investment just to maintain the current generation capacity, and another up to $51.3 billion (50 billion euros) in the long-term operation of existing reactors, according to the EU commissioner.

New technology, such as Small Modular Reactors (SMRs), could be the solution to integrate the energy system and decarbonize the sectors that pose the biggest challenge, said Simson, adding that the EU aims to have the first European SMRs go live in the early 2030s.

Vast gap highlights the dire state of Sam Bankman-Fried’s exchange before it collapsed into bankruptcy

Sam Bankman-Fried’s main international FTX exchange held just $900mn in easily sellable assets against $9bn of liabilities the day before it collapsed into bankruptcy, according to investment materials seen by the Financial Times.

The largest portion of those liquid assets listed on a FTX international balance sheet dated Thursday was $470mn of Robinhood shares owned by a Bankman-Fried vehicle not listed in Friday’s bankruptcy filing, which included 134 corporate entities.

The document, shared with prospective investors before the bankruptcy, provides a detailed picture of the financial hole in the FTX crypto empire and suggests customers of FTX international may face steep losses on cash and crypto assets they held on the exchange.

FTX’s collapse has delivered a powerful blow to a crypto industry already reeling from a string of corporate failures this year.

Bankman-Fried had been a leading figure in the sector and had presented himself as an entrepreneur keen to bring the wild west crypto market in line with mainstream regulation. The 30-year-old had secured backing from blue-chip investors, became a major donor to the US Democratic party and plastered his FTX exchange’s logo on the Miami Heat arena during his meteoric rise following the founding of his trading venue in 2019.

Bankman-Fried on Friday put his $32bn international exchange, along with FTX US and his trading firm Alameda Research, into bankruptcy proceedings in federal court in Delaware.

John J Ray, the veteran insolvency practitioner brought in to run the bankruptcy as FTX chief executive, said on Friday that the cryptocurrency group “has valuable assets” and that the bankruptcy proceedings would allow the company to “assess the situation and . . . maximise recoveries for stakeholders”.

The process has already run into issues after barely 24 hours, incorrectly listing entities FTX did not own in its initial filing and suffering an apparent hack on Friday night.

FTX declined to comment.

Friday’s bankruptcy filing provided few details on the group’s financial health but said both assets and liabilities range between $10bn-$50bn, and that the number of creditors exceeds 100,000.

A spreadsheet listing FTX international’s assets and liabilities, seen by the Financial Times, point at the issues that brought Bankman-Fried crashing back down to earth. It references $5bn of withdrawals last Sunday, and a negative $8bn entry described as “hidden, poorly internally labled ‘fiat@’ account”.

Bankman-Fried told the Financial Times the $8bn related to funds “accidentally” extended to his trading firm, Alameda, but declined to comment further. Earlier this week, he tweeted that FTX international had $4bn in easily tradeable assets when it faced Sunday’s $5bn surge of withdrawals.

“There were many things I wish I could do differently than I did, but the largest are represented by these two things: the poorly labeled internal bank-related acount [sic], and the size of customer withdrawals during a run on the bank,” the spreadsheet adds.

In the investment materials, FTX Trading Ltd, the company behind the main international exchange, is recorded as having liabilities of $8.9bn, the biggest portion of which is $5.1bn of US dollar balances.

Healthy companies typically have assets that match or exceed their liabilities. The spreadsheet says FTX Trading had a total of $9.6bn of assets, but it is unclear how much of that value could be realised.

The vast majority of FTX Trading’s recorded assets are either illiquid venture capital investments or crypto tokens that are not widely traded, according to the spreadsheet, which cautions that the figures “are rough values, and could be slightly off; there is also obviously a chance of typos etc. They also change a bit over time as trades happen.”

The company’s biggest asset as of Thursday was $2.2bn worth of a cryptocurrency called Serum. Serum’s market value was $88mn on Saturday, according to data provider CryptoCompare, suggesting FTX’s holdings would be worth far less if sold into the market. CryptoCompare’s figures take into account the coin’s liquidity.

On Friday, the Financial Times reported that Alameda and FTX between them had some $5.4bn of illiquid venture capital investments, according to other documents provided to investors earlier in the week.

Bankman-Fried had been racing to raise emergency funding but was unable to persuade investors to rescue his collapsed business empire.

The new investment materials show that he was seeking to raise $6bn-$10bn including from a convertible preferred stock paying a 10 per cent dividend that could later be converted into common equity in FTX international at a valuation of between $12bn-$15bn. “This is just a lower bound on the terms investors can get,” the materials add.

Until Friday afternoon, Bankman-Fried was looking to sell the $472mn of Robinhood shares, the largest liquid asset listed for FTX Trading, in privately negotiated deals he was arranging on the messaging app Signal, according to a person directly involved in the negotiations.

The person noted that the Robinhood shares were held by an Antigua and Barbuda entity called Emergent Fidelity, which is personally controlled by Bankman-Fried, according to US securities filings. Emergent Fidelity is not among the entities listed in Friday’s bankruptcy filing.

Bankman-Fried was entertaining offers at an about 20 per cent discount to Robinhood’s volume-weighted average price, or about $9 per share, said the investor, who ultimately declined to buy due to perceived legal risks.

Bankman-Fried acquired a 7.6 per cent stake in Robinhood in May and had intimated at considering a full acquisition of the popular trading app.

The second-biggest liquid asset was $200mn of cash held with Ledger Prime, a crypto investment firm owned by Alameda. The documents record no other US dollar balances held by FTX Trading.

In all, the spreadsheet says FTX Trading’s assets were $900mn of “liquid” assets, $5.5bn of “less liquid” assets consisting of crypto tokens, and $3.2bn of illiquid private equity investments. There is also an obscure $7mn holding called “TRUMPLOSE”. There are no bitcoin assets listed, despite bitcoin liabilities of $1.4bn.

Other documents provided to investors say that FTX US, Bankman-Fried’s onshore exchange, held $115mn of cash. Of that sum, $48mn was listed as corresponding to customer US dollar balances of $60mn.

Galois warns investors it could take ‘a few years’ to recover assets

Galois Capital, a hedge fund whose founder is credited with spotting the collapse of cryptocurrency luna this year, has been caught off guard after close to half its assets were left trapped on crypto exchange FTX, which filed for bankruptcy protection on Friday.

Galois co-founder Kevin Zhou wrote to investors in recent days, in a letter seen by the Financial Times, that while the fund had been able to pull some money from the exchange, it still had “roughly half of our capital stuck on FTX”. Based on Galois’s assets under management as of June, that could amount to around $100mn.

“I am deeply sorry that we find ourselves in this current situation,” wrote Zhou. “We will work tirelessly to maximise our chances of recovering stuck capital by any means.”

He added that it could take “a few years” to recover “some percentage” of its assets.

FTX on Friday said Sam Bankman-Fried was resigning as chief executive, after failing in a last-ditch effort to secure a rescue package. It follows a tumultuous week in which the exchange admitted it was unable to meet customer withdrawal demands without external funds, raising fears that clients could face big losses.

FTX’s Chapter 11 bankruptcy filing in a federal court in Delaware includes FTX’s US entity, Bankman-Fried’s proprietary trading group Alameda Research and about 130 affiliated companies. His empire was valued at $32bn just months ago.

Industry insiders say that the fact FTX was used by so many hedge funds and seen as one of the world’s safer crypto trading venues means many managers may have money stuck on the exchange.

Galois did not immediately respond to a request for comment.

Galois is one of the industry’s biggest crypto-focused quant funds and, as of this summer, it was managing more than $200mn in assets. A major part of its trading activity is as a market maker, allowing it to make tiny gains on other investors’ trades.

Zhou, who worked at digital exchange Kraken before setting up Galois, is well known for his early criticism of cryptocurrency luna and its linked stablecoin terraUSD, ahead of their $40bn collapse in May.

He said in the letter that his fund had been left with the money in FTX because it had “a ton of open positions” that it had to close and due to “underappreciating the solvency risk with holding our funds at FTX”. 

He added that if FTX did file for bankruptcy, then Galois would become a creditor.

If that happened, then “I expect we will recover some percentage of our assets on FTX over the course of a few years,” he said.