The collapse of FTX, once a $32 billion crypto exchange, shattered investor confidence in cryptocurrencies. Market players are scrambling to gauge the extent of the damage it has caused and how it will reshape the industry in the years to come.
Sam Bankman-Fried, the former head of FTX who resigned on November 11, was arrested in the Bahamas last week. He has been charged by the US government with wire fraud, securities fraud and money laundering.
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FTX is connected to buyers and sellers of digital currencies such as bitcoin, as well as derivatives. However, the company did more than that, allegedly hacking into customer accounts to make risky trades through its sister company Alameda Research.
“It’s extremely frustrating for investors, or rather devastating for investors,” said Louise Abbott, a partner at Keystone Law, a law firm specializing in crypto asset recovery and fraud.
It is clear that the FTX drama could radically transform crypto in the coming years. Here are three big ways it could change the industry.
First of all, the disaster seems likely to spur regulators into action.
Crypto as an industry is still largely unregulated, meaning investors don’t have the same protections they would have by depositing their funds with a licensed bank or broker.
That may change. The US, EU and UK governments are taking steps to clean up the market.
Without regulation, investors are left without the protection they need.
Partner, Keystone Law
The EU’s Crypto-Assets markets are the most comprehensive regulatory framework to date. It aims to reduce risks for consumers buying crypto by holding exchanges accountable if they lose investors’ assets.
But MICA has to start only after 12 months. Keystone Law’s Abbott said it’s important that regulators act quickly.
“People need to see that steps are being taken to fix this. And I think if we can offer some settlement, we will build trust,” he said. “Unless there is regulation, investors are left without the protection they need.”
The saga has delayed the adoption of crypto assets by “a year or two,” according to Eugene Gayvo, founder and CEO of crypto market maker Wintermute.
“Everything that failed this year, if you look at Celsius now, Three Arrows, FTX, all those guys were having the worst of both worlds because they weren’t fully decentralized and they weren’t properly centralized either,” he said.
For Kevin de Patul, CEO of crypto market maker Wintermute, the biggest lesson from the FTX bankruptcy is that “you can’t have total concentration and no control.”
“We are evolving into a world where you will have both centralization and decentralization,” he said. “When you have that focus, you have to have the proper control and the proper balance of power.”
I don’t think that all the dominoes have fallen out of the infection. The effect of this is that many projects will not actually have funding…
Executive Director, Near Foundation
“The challenge for the entire space when you think about contagion is that FTX and Alameda have been extremely active investors in this space,” Blockchain.com CEO Peter Smith said in a CNBC-led speech at a crypto conference in London.
The Near Foundation, which is behind a blockchain network called Near, was among the companies that received investment from FTX. Near’s chief executive Mariek Flament said the company had limited exposure to FTX, although the collapse was still “surprising and shocking”.
“I don’t think all dominoes have been infected,” Flament said. “The impact that this will have is that many programs will not really have the funds, and therefore the resources, to continue and grow.”
After FTX’s failure, there were concerns about the financial health of other major crypto exchanges. According to data from CryptoQuant, around 900,000 bitcoins have flowed from exchanges since the beginning of 2020.
The world’s largest exchange, Binance, is struggling with the reserves it holds to bounce back customer funds. Over the past week, the company has seen billions of dollars in outflows.
There is currently no reason to suspect that Binance is facing bankruptcy. But exchanges like Binance and Coinbase: ahead against a gloomy market backdrop with declining trading volumes and account balances.
Experts believe they will continue to play a role, although their survival will be determined by how seriously they take risk management, governance and regulation.
“There will be exchanges that do things the right way and that will survive,” Abbott said.
As for the signs – bitcoinbeing the longest-running digital currency may be better positioned than its smaller competitors.
“My bet would be that Bitcoin and DeFi [decentralized finance] they’re separated from the rest of the cryptos and actually take on a life of their own,” Wintermute’s Gaevoi told CNBC.
Despite the depressed state of crypto-markets and the toll on investors, the digital asset industry is likely to move forward.
Proponents of Web3, a hypothetical blockchain-based internet, expect the crypto winter of 2022 to pave the way for more innovative uses of blockchain, rather than the speculative uses of crypto today.
“What we’re seeing a lot is that companies have digital innovation arms or metaverse innovation arms,” Flament said. “They understand the technology is here, it’s not going away.”
NFTs, or non-fungible tokens, can change the way users relate to gaming and event properties, for example. These are digital assets that track ownership of unique virtual items on the blockchain.
“Digital assets will become a growing part of our lives, whether it’s a collectible, a ticket, a value, an identity,” Ian Rogers, chief experience officer at crypto wallet company Ledger, told CNBC. “Identity can be membership… [people] using the NFTs they own to gain access to a certain event or something like that.”
But for many, there is still a learning curve to overcome. “It’s hard to create wallets, store keys and switch between platforms,” Cordell Robin-Coker, CEO of mobile gaming firm Carry1st, told CNBC at the Slush startup conference in Helsinki, Finland.
Robin-Coker compared Web3 today to the Internet of the early 90s. “It was convoluted. You had dial-up, it took four minutes to connect, the original web browsers weren’t very intuitive,” he said.
“It’s really the early adopters that are really engaged at that stage. But over time, companies build smoother interfaces. And they cut the steps.”