FTX Meltdown Threatens To End Crypto’s ‘Wild West’ Era | cryptocurrency

FTX was one of the largest cryptocurrency exchanges in the world – until it fell apart in a matter of days earlier this month.

In the wake of the collapse of Sam Bankman-Fried’s crypto empire, heightened government oversight and calls for more regulation threaten to spell the end of the freewheeling, Wild West era for digital assets.

“The collapse of FTX is drawing international attention,” David Gerard, a vocal critic of the crypto sector and the author of Attack of the 50 Foot Blockchain, told Al Jazeera.

“The regulators don’t care if crypto self-destructs. They care if it affects anyone else.

Nearly two weeks after FTX Trading Ltd — and its more than 100 affiliated global entities, including trading arm Alameda Research — filed for bankruptcy in the United States, the industry-wide implosion continues to ripple as traders withdraw their funds from any centralized exchange they deem shaky to be.

Genesis Global Capital, the largest crypto lender, said it has $175 million in an FTX account and has reportedly warned investors that it could be forced to file for bankruptcy if it cannot secure additional funding.

Crypto lender BlockFi said it had “significant exposure” to FTX and also warns of a possible bankruptcy filing.

Crypto.com, a crypto exchange based in Singapore, has seen more customer withdrawals after the company’s CEO acknowledged it had mishandled a transaction worth around $400 million. All in all, FTX, which is headquartered in the Bahamas, is said to have as many as one million creditors, according to bankruptcy filings.

Unlike creditors who eventually get some of their money back through bankruptcy, shareholders typically get zero. At least 80 companies invested $2 billion in FTX, including a $400 million round in January that valued FTX at $32 billion.

Temasek, one of Singapore’s two major sovereign wealth funds, told its financiers last week that it will write off its entire $275 million investment. Japan’s Softbank expects to write off $100 million. Other major investors include Sequoia, BlackRock, Tiger Global, Insight Partners and Paradigm.

FTX founder Sam Bankman-Fried resigned as CEO after the crypto exchange filed for bankruptcy [File: Handout via Reuters]

From the beginning, cryptocurrencies have been a largely unregulated industry. Offshore crypto exchanges have operated with almost zero oversight, with investors having little visibility into what goes on behind the scenes.

Over the past decade, the industry has seen the rise of larger crypto bubbles, followed by more spectacular collapses and bigger losses.

US Securities and Exchange Commission (SEC) Chairman Gary Gensler has been pushing for more crypto regulation since his appointment in April 2021. Last year, he described cryptocurrencies as an asset class rife with fraud, scams, and abuse.

During FTX’s first bankruptcy hearing on Tuesday, lawyers for troubled crypto exchange accused Bankman-Fried, who stepped down as CEO earlier this month, of running the company as a “personal fiefdom,” with $300 million spent on property for senior staff .

Bankman-Fried and FTX are under investigation by the US Department of Justice, SEC and the Commodity Futures Trading Commission (CFTC) for possible violations of securities laws.

For many industry observers, the wreckage left behind by FTX is a wake-up call for regulators to do more to contain the space.

Stephen Diehl, a computer programmer who has lobbied U.S. lawmakers for stronger crypto regulation, said FTX’s collapse could be compared to banking giants like JP Morgan or CitiBank disappearing overnight — something hard to imagine after the introduction of stricter regulations for cryptocurrencies. banks in the aftermath of the financial crash of 2007-2008.

“Financial regulators will no doubt file more lawsuits against the industry in the US,” Diehl told Al Jazeera. “The trust of the public has been betrayed.”

Martin Walker, banking and finance director at the nonprofit Center for Evidence-Based Management, said the biggest effect of the collapse could be that industry lobbying efforts in Washington, D.C. find a less receptive audience after they have gained momentum during the cryptocurrency of 2021. bubble.

Bankman-Fried made $39 million in political donations during the most recent U.S. election cycle and was Joe Biden’s second-largest individual donor during this 2020 election campaign.

“All of these failures in the crypto industry mean less money and less credibility for the crypto lobby in its efforts to pass legislative changes that ‘legitimize’ rather than actually control the industry’s endemic problems,” Walker told Al Jazeera.

Walker speaks on stage with a clicker in one hand
Martin Walker of the Center for Evidence-Based Management expects the Washington, D.C. crypto industry’s lobbying efforts to be difficult going forward [Courtesy of Martin Walker]

Hillary Allen, a professor at the American University Washington College of Law, said the failure of FTX showed that bank regulation has done a good job of protecting traditional finance from crypto.

“Damage has been done to crypto investors, but the damage has not spread to others like it did in 2008,” Allen told Al Jazeera, referring to the global recession that followed the collapse of Lehman Brothers.

Allen said that while the public would benefit from more enforcement, governments should avoid building bespoke regulations from scratch.

“If crypto products and services cannot comply with existing regulations, they should not exist,” she said.

While FTX was led by an American and based in the Bahamas, the implosion has reverberated globally, with some of the biggest impacts in Asia.

According to an analysis by CoinGecko, South Korea, Singapore, and Japan had the largest number of users on FTX in that order. After Binance, the largest crypto exchange, pulled out of Singapore last year, many crypto traders switched to FTX, which could explain the city-state’s high ranking on the list.

Singapore rolled out the welcome wagon for crypto companies after the US began cracking down on initial coin offerings in 2017, most of which were unregistered securities offerings. Binance once described the city-state as a “crypto paradise”.

However, the Monetary Authority of Singapore (MAS) began cracking down on crypto after a series of high-profile failures in May, including the collapse of Singapore-based Terraform Labs, the company behind the terraUSD stablecoin.

The collapse of terraUSD, which was believed to be pegged to the US dollar, and Terraform’s Anchor lending platform brought down several other companies, including Singapore-based crypto hedge fund Three Arrows Capital.

In October, MAS unveiled proposals for new regulatory measures to mitigate the harm to cryptocurrency and stablecoin users.

Ismail wears glasses, has a short haircut, wears a suit with a pink and white striped tie
Nizam Ismail, founder and CEO of Ethikom Consultancy, says Singapore’s moves to regulate cryptocurrencies are a step in the right direction [Courtesy of Nizam Ismail]

Nizam Ismail, the founder of Singapore-based Ethikom Consultancy, said the steps are a step in the right direction, but gaps remain.

“Some quite fundamental issues, such as segregation of assets from customers and proper disclosures, need to be put in place immediately,” Ismail told Al Jazeera.

As for the future of crypto, industry watchers don’t see it disappearing completely.

Some in the room remain optimistic about the industry’s potential, even as they express outrage and disappointment at the effect Bankman-Fried has had on its image.

“These are growing pains. Money can be made again,” Jesse Power, the founder of US crypto exchange Kraken, summed up in a lengthy Twitter thread earlier this month.

But Diehl, the anti-crypto activist, said he expected the public to be less patient with regulators providing safe havens for crypto companies with questionable business practices.

He added that “the crypto industry will eventually be largely relegated to the dark corners of the financial system as it slowly becomes irrelevant.”

Leave a Comment