The FTX collapse, once a $32 billion crypto exchange, has shattered investor confidence in cryptocurrencies. Market players are trying 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, a former FTX boss 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 bitcoins, as well as derivatives. However, the company did more than that, allegedly dipping into customer accounts to make risky operations through its sister firm Alameda Research.
“It’s hugely disappointing for investors, or more devastating for investors,” said Louise Abbott, a partner at the Keystone Law firm, which specializes in crypto asset recovery and fraud.
It is clear that the FTX drama could radically reshape cryptocurrencies for years to come. Here are three big ways the industry could change.
On the one hand, it seems certain that the disaster will send regulators into action.
Cryptocurrency as an industry is still largely unregulated, which means that investors do not have the same protections as they would when placing their funds with a licensed bank or broker.
That may be about to change. The US, EU and UK governments are taking steps to clean up the market.
The EU Markets in Crypto-Assets it is the most comprehensive regulatory framework to date. Their goal is to reduce risks for consumers buying crypto by holding exchanges liable if they lose investor assets.
But MICA won’t start for another 12 months. Keystone Law’s Abbott said it’s important for regulators to act quickly.
“People need to see that steps are being taken to regulate it. And I think if we can offer some regulation, we will build trust,” she said. “If there is no regulation, investors are left without the protection they need.”
The saga has set crypto asset adoption back by “a year or two,” according to Evgeny Gaevoy, founder and CEO of crypto marketplace creator Wintermute.
“Everything that failed this year, if you look at Celsius, Three Arrows, FTX now, all those guys were taking the worst of both worlds because they weren’t fully decentralized and they weren’t properly centralized either,” he said.
For Kevin de Patoul, CEO of crypto-market creator Wintermute, the biggest lesson from the FTX bankruptcy is that “you can’t have complete centralization and lack of oversight.”
“We are evolving towards a world where there will be both centralization and decentralization,” he said. “When you have that centralization, you need to have proper oversight and proper balance of power.”
“The challenge for the whole space when you think about contagion is that FTX and Alameda were extremely active investors in this space,” Peter Smith, chief executive of Blockchain.com, said in a talk moderated by CNBC at a crypto conference in London.
The Near Foundation, which is behind a blockchain network called Near, was one of the companies that received investment from FTX. Marieke Flament, CEO of Near, said the company had limited exposure to FTX, though the collapse remained “a surprise and a shock.”
“I don’t think all the dominoes have fallen from contagion,” Flament said. “The impact that this will have is that many projects won’t actually have the funding and therefore the resources to continue and develop.”
Fears have been raised about the financial health of other major crypto exchanges after the failure of FTX. Since the beginning of 2020, around 900,000 bitcoins have left exchanges, according to data from CryptoQuant.
Binance, the world’s largest exchange, is facing questions about the reserves it holds to back client funds. The company saw billions of dollars in departures last week.
Currently, there is no reason to suspect that Binance faces any bankruptcy risk. But exchanges like Binance and coin base They face a bleak market backdrop ahead amid falling 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 trades that are doing things the right way and will survive,” Abbott said.
As for the tokens – bitcoinsbeing the longest-lived digital currency, it may be better positioned than its smaller rivals.
“My bet would be that bitcoin and DeFi [decentralized finance] they are decoupled from the rest of the cryptocurrencies and are actually starting to have a life of their own,” Wintermute’s Gaevoy told CNBC.
Despite the depressed state of the crypto markets and the toll it has taken on investors, the digital asset industry is likely to bounce back.
defenders of “Web3a hypothetical blockchain-based internet, the crypto winter of 2022 is expected to pave the way for more innovative uses of blockchain, rather than the speculative uses that cryptography is associated with today.
“What we’re seeing a lot is companies have digital innovation arms or metaverse innovation arms,” Flament said. “They understand that the technology is here. It’s not going away.”
NFTs, or non-fungible tokens, could disrupt user relationships with properties at games and events, for example. These are digital assets that track ownership of unique virtual items on the blockchain.
“Digital assets will be an increasing part of our lives, whether it’s a collectible, a ticket, a value, an identity,” Ian Rogers, chief experience officer at crypto wallet firm Ledger, told CNBC. “Identity could be membership… [people] using NFTs they own to gain access to a particular event or something.”
But for many, there is still a learning curve to overcome. “It’s hard to create wallets and store keys and go across different platforms,” Cordel Robbin-Coker, CEO of mobile gaming firm 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. It had dial-up, it took four minutes to connect, original web browsers weren’t very intuitive,” he said.
“It’s really the early adopters that really get involved at that stage. But over time, companies build more seamless interfaces. And they reduce the steps.”