Crypto's Lehman moment: Here's how Sam Bankman-Fried's FTX compares to the biggest collapse of the Global Financial Crisis

Crypto's Lehman moment: Here's how Sam Bankman-Fried's FTX compares to the biggest collapse of the Global Financial Crisis
Omicron has brought volatility to Wall Street.Yellow Dog Productions/Getty Images
  • Experts have drawn comparisons between the collapse of crypto exchange FTX and the fall of Lehman Brothers in 2008.
  • FTX on Friday filed for bankruptcy after it failed to secure a rescue.

FTX filed for bankruptcy on Friday, failing to secure a rescue from rival crypto exchanges and deepening fears that the cryptocurrency market is teetering on the edge of its own Lehman Brothers moment.

In the years leading up to the Great Financial Crisis, Lehman loaded its balance sheet with vast amounts of subprime mortgage debt. The value of these securities plummeted with the collapse of the housing market, kicking off a domino effect that rippled through the global economy and culminated in the worst financial crisis since the Great Depression.

Could the FTX situation be that bad? Probably not. But it's troubling.

When US housing imploded and some the largest financial institutions began to wobble, the Federal Reserve stepped in with a rescue for Bear Stearns, but famously let Lehman go under. At the time of its collapse in September 2008, the bank was the fourth-largest in the US and had about $650 billion in assets.

The collapse of a firm as large as Lehman Brothers, with massive exposure to a failing market and extreme counterparty risk stemming from huge amounts of complex derivatives and credit default swaps, would be expected to lead to huge fallout — and it did.


The 2008 crisis led to widespread wealth destruction, and a deep recession that wiped trillions from the value of the global economy.

Crypto's Lehman moment

Now consider FTX, which on Friday filed for Chapter 11. In its bankruptcy petition it lists assets of $10 billion to $50 billion and says it has more than 100,000 creditors.

While far smaller than Lehman, Bankman-Fried's exchange faces similar problems. On the balance sheet front, it was weighed down by an asset with a rapidly depleting value in the form of its native FTT token. Since a report from Coindesk revealed that Bankman-Fried's trading firm, Alameda Research, counted billions worth of FTT as assets on its balance sheet, questions swirled about the solvency of both companies and sparked a sell-off.

"It ended up being very similar to Lehman because of how over-leveraged it was," Brent Xu, founder of blockchain firm Umee, told Insider.

What's more, FTX put up clients' funds as collateral for its own business to mitigate losses while simultaneously bringing on more investors. When the "bank run" began this week, FTX didn't have the funds to meet withdrawal requests.


On the news, bitcoin fell to $16,000, its lowest price in two years. Other tokens like Solana and ether plunged, and stablecoin Tether lost its peg to the dollar.

"The crypto ecosystem has been made fragile by leverage and interconnectedness, just as the traditional financial system was fragile because of leverage and interconnectedness in 2008," Hilary Allen, a financial regulation expert and law professor at American University, told Insider.

Crypto's Lehman moment: Here's how Sam Bankman-Fried's FTX compares to the biggest collapse of the Global Financial Crisis
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All of this is bad, and there are deep risks to those who had money locked up in FTX accounts or anyone trading with Alameda. But compared to 14 years ago, it probably won't be FTX's downfall that sparks a broader financial crisis, Allen said.

The economy still relies on traditional finance rather than crypto for credit provisions and payment processing, so any fallout is likely to stay contained to the sector, she explained.

"The primary use of crypto is speculation, and so its failure is unlikely to have broader repercussions so long as the traditional financial system has no significant exposure to crypto," Allen noted.


Even with the events of the past week rattling the crypto world, it isn't guaranteed to have systemic repercussions, and slipping crypto prices could be a temporary, knee-jerk market reaction.

"This is a shock to the system, but it has yet to be seen if the contagion will impact crypto in the same way Lehman did in 2008," David Siemer, CEO of Wave Financial, told Insider. "It is abundantly clear that companies and platforms can no longer get away with hiding their reserves and keeping not only investors but also consumers in the dark."

What comes next for crypto

It's possible FTX's implosion marks only the beginning of a wider reckoning in crypto, as more dominoes could still fall.

"It looks likely that a new cascade of margin calls, deleveraging and crypto company/platform failures is starting," JPMorgan analysts wrote on Wednesday.

The big difference between 2008 and this week may end up being who comes to the rescue. Crypto isn't connected to the real economy in the way mortgages were in 2008, which means its plunge is not a concern for the government. But that means one of the largest players, once viewed as the potential backstop for the whole market, is out of the game.


"What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking within the crypto ecosystem," JPMorgan wrote.

Moving forward, companies may be forced to change their behavior, or regulators may change it for them by tightening the screws. 2008 ushered in a massive overhaul of financial regulation, creating entirely new agencies to police the worst excesses that caused the crash.

"What we will see similar to Lehman is an acceleration of regulations to protect market participants, namely the retail investors who yet again bear the brunt of the damage," Siemer said. He predicts the most regulated and compliant firms will emerge as the biggest players.

Confidence in the sector will remain shaky for some time, though, as the ripple effects of FTX's implosion continue. Illustrating this is crypto lender BlockFi, which this week announced it would halt client withdrawals and limit activity on the platform as a result of the FTX chaos.

"Given the lack of clarity on the status of, FTX US and Alameda, we are not able to operate business as usual," BlockFi said, stating its priority is to protect its customers and their interests.


"The industry needs to mature before it can recover, whether this comes from enhanced government policies on how to interact with crypto, or more sophisticated asset managers handling the movement of large sums of assets," Siemer said.