First it was luna, then Celsius and now crypto exchange FTX but the question concerning crypto exchange-traded product (ETP) issuers is who will be next following yet another epic collapse in the digital assets market.

The downfall of Sam Bankman-Freid’s FTX empire last week has wiped $150bn off the cryptocurrency market’s value while the true extent of the crisis is still coming to light.

The former Jane Street trader founded the exchange in 2019, and understanding the rapid rise and fall of FTX will go a long way in explaining why so many are sceptical about an industry that claims it wants to democratise finance but is so open to manipulation and fraud

Just hours after the exchange filed for bankruptcy, concerns were raised over “abnormalities with wallet movements” which saw $650m withdrawn from FTX funds, prompting fears the site had been hacked.

Predictably, the contagion has already spilled over into the ETP space.

Crypto ETPs have been in turmoil since the revelations came to light. Three ETPs tracking FTX, the VanEck FTX Token ETN (VFTX), the 21Shares FTX Token ETP (AFTT) and the CoinShares FTX Physical FTX Token (CFTT), have lost over 91% of their value over the past seven days and will likely go the way of terra earlier this year.

Another crypto to be significantly impacted is solana, due to speculation around its links to FTX, while bitcoin fell 22.9% last Wednesday, dipping below $16,000 for the first time since 2020.

Perhaps more concerning, Europe’s largest digital asset issuer CoinShares revealed on Thursday it has $30.3m of exposure to FTX, over 10% of the group’s net asset value.

The news prompted 21Shares to announce on LinkedIn it had no exposure to FTX, leading to an interesting exchange between two CEOs of crypto issuers, highlighting tensions simmering below the surface of the crypto ETP industry.

A close call and an important reminder that there is just no way of really knowing when things will go wrong.

Crypto issuers will tell you it is about giving the investor the choice to invest in a wide range of cryptocurrencies via the security of the ETP wrapper. But, as we have seen on several occasions this year, things can, and will, go wrong.

So, perhaps another question issuers need to ask themselves is, at what point does crypto become damaging to the ETP wrapper, and the wider ETF ecosystem?

Crypto ETP launches have slowed down in the second half of this year, following a flurry of launches tracking anything and everything – with seemingly little regard for risk – in the previous 12 months.

This can only be a good thing as the wider ecosystem catches up and is allowed to put processes in place so this nascent asset class can be traded safely.

The latest crypto escapade has already increased calls for more stringent regulation. But ultimately, ETP issuers need to do greater due diligence about what digital assets they are tracking in the first place, or risk tarnishing the wrapper.

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