The collapse of FTX, once a $32 billion crypto exchange, has shaken investor confidence in cryptocurrencies. Market participants are trying to gauge the extent of the damage it has caused – and how it will transform 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 connected buyers and sellers of digital currencies like 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 very disappointing for investors, or even more 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 reshape crypto in the years to come. Here are three big ways the industry could transform.
For one thing, the disaster is sure to prompt regulators to act.
Crypto as an industry is still largely unregulated, meaning investors don’t have the same protections they would have if they placed their funds with a licensed bank or broker.
This could change soon. The US, European Union and UK governments are taking steps to clean up the market.
The EU markets for crypto assets are the most comprehensive regulatory framework yet. It aims to reduce the risks for consumers buying crypto and make exchanges liable if they lose investors’ wealth.
But MICA is only scheduled to start in 12 months. Keystone Law’s Abbott said it was important for regulators to act quickly.
“People need to see steps being taken to regulate it. And I think if we’re able to offer regulation, we’ll build trust,” she said. “If there’s no regulation, investors don’t have the protection they need.”
According to Evgeny Gaevoy, founder and CEO of crypto market maker Wintermute, the saga has delayed crypto asset adoption by “a year or two.”
“Everything that failed this year, if you look at Celsius now, Three Arrows, FTX – all these guys took the worst of both worlds because they weren’t fully decentralized and they weren’t really centralized either,” he said.
For Kevin de Patoul, CEO of crypto market maker Wintermute, the key lesson from FTX’s bankruptcy is that “you can’t have total centralization and a lack of oversight.”
“We are moving into a world where there will be both centralization and decentralization,” he said. “If you have that centralization, you have to have proper oversight and balance of power.”
“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-moderated talk at a crypto conference in London.
Near Foundation, which is behind a blockchain network called Near, was among the companies accepting investments from FTX. Near’s CEO Marieke Flament said the company had limited exposure to FTX – although the collapse was still “a surprise and a shock”.
“I don’t think all the dominoes fell out from the contagion,” Flament said. “This will result in many projects actually not having the funds and therefore the resources to continue and develop them further.”
Fears about the financial health of other major crypto exchanges have risen following the failure of FTX. According to CryptoQuant, around 900,000 bitcoins have flowed out of the exchanges since the beginning of 2020.
Binance, the world’s largest exchange, is facing questions about the reserves it holds to secure client funds. The company has seen billions of dollars in outflows over the past week.
There is currently no reason to believe that Binance is at risk of bankruptcy. But exchanges like Binance and coin base are facing a grim market environment amid 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 right and that will survive,” Abbott said.
As for tokens – Bitcointhe longest-lived digital currency, could be better positioned than its smaller peers.
“My bet would be Bitcoin and DeFi [decentralized finance] are decoupled from the rest of crypto and are actually starting to have a life of their own,” Wintermute’s Gaevoy told CNBC.
Despite the depressed state of crypto markets and the toll being taken by investors, the digital asset industry is likely to prevail.
Proponents of “Web3,” a hypothetical blockchain-based internet, expect that the crypto winter of 2022 will pave the way for more innovative uses of blockchain, rather than the speculative uses that crypto is associated with today.
“What we see a lot are companies that have digital innovation arms or metaverse innovation arms,” Flament said. “You understand the technology is here. She won’t go away.”
For example, NFTs, or non-fungible tokens, could alter how users relate to properties in games and events. These are digital assets that track ownership of unique virtual items on the blockchain.
“Digital assets are going to be an increasing part of our lives, whether it’s a collectible, a ticket, a value or an identity,” Ian Rogers, chief experience officer at crypto wallet firm Ledger, told CNBC. “Identity could be membership… [people] using NFTs that they own to gain access to a specific event or something like that.”
But for many, there is still a learning curve to overcome. “It’s difficult to create wallets and store keys and traverse different platforms,” Cordel Robbin-Coker, CEO of mobile games company Carry1st, told CNBC at the Slush startup conference in Helsinki, Finland.
Robbin-Coker compared Web3 today to the Internet in the early 1990s. “It was clunky. You had to dial in, it took four minutes to log in, the original web browsers weren’t very intuitive,” he said.
“It’s really the early adopters who really get involved at this stage. But over time, companies build smoother interfaces.