Betrayed: FTX Meltdown Signals End Crypto's Wild West Days

Betrayed: FTX Meltdown Signals End Crypto’s Wild West Days

Boston, United States – FTX was one of the largest cryptocurrency exchanges in the world – until it collapsed in a matter of days earlier this month.

In the wake of the collapse of Sam Bankman-Fried’s crypto empire, increased government scrutiny and demands for more regulation threaten to spell the end of the free-roaming Wild West era for digital assets.

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

“Regulators don’t care if crypto self-destructs. They don’t care if it affects someone else.”

Nearly two weeks after FTX Trading Ltd – and its more than 100 affiliated global companies, including trading arm Alameda Research – filed for bankruptcy in the United States, the implosion continues to reverberate across the sector as traders withdraw funds from every central exchange who see fit are shaken.

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

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

Crypto.com, a Singapore-based crypto exchange, faced higher customer withdrawals after the company’s chief executive admitted it mishandled a roughly $400 million transaction. In total, FTX, based in the Bahamas, is said to have up to one million creditors, according to bankruptcy filings.

Unlike creditors, who eventually get some of their money back through bankruptcy, shareholders typically end up with zero. At least 80 companies have 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 supporters last week that it would write off its entire $275 million investment. The Japanese Softbank expects a write-down of 100 million dollars. Other big 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]

Cryptocurrencies have been a largely unregulated industry from the start. Offshore crypto exchanges have operated with almost no oversight, with investors having little insight into what is going on behind the scenes.

Over the past decade, the sector has seen the emergence 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 stronger crypto regulation since his appointment in April 2021. Last year, he described cryptocurrencies as an asset class “riddled with scams, fraud and abuse.”

In FTX’s first bankruptcy hearing on Tuesday, lawyers for the struggling crypto exchange accused Bankman-Fried, who resigned as chief executive earlier this month, of running the company as a “personal fiefdom” and spending $300 million on real estate for senior executives.

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

For many industry observers, the debris 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 US lawmakers for stronger crypto regulation, said FTX’s collapse could be compared to the overnight disappearance of banking giants like JP Morgan or CitiBank — something that happened after tighter regulation was introduced it would be hard to imagine banks after the financial crash of 2007-2008.

“Financial regulators will no doubt pursue further law enforcement proceedings against the industry in the US,” Diehl told Al Jazeera. “Public trust has been abused.”

Martin Walker, director of banking and finance at the nonprofit Center for Evidence-Based Management, said the biggest impact of the collapse could be that industry lobbying in Washington, D.C., finds a less receptive audience after being hit during crypto 2021 Bladder is in full swing.

Bankman-Fried made $39 million in political contributions during the last US election cycle and was the second-largest single donor to Joe Biden in this 2020 campaign.

“All of these failures in the crypto industry mean less money and less credibility for the crypto lobby in their efforts to push through legislative changes that ‘legitimize’ the industry’s endemic problems, rather than truly controlling them,” Walker told Al Jazeera.

Walker speaks from a podium with a clicker in one hand
Martin Walker of the Center for Evidence-Based Management believes that crypto industry lobbying in Washington, DC will face difficulties in the future [Courtesy of Martin Walker]

Hillary Allen, a professor at American University’s Washington College of Law, said the failure of FTX shows that banking regulation did a good job of protecting traditional finance from crypto.

“Crypto investors have been hurt, but the damage hasn’t 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 increased enforcement, governments should avoid creating bespoke regulatory regimes from scratch.

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

While FTX was American-led and based in the Bahamas, its implosion has resonated around the world, with some of the biggest repercussions in Asia.

According to CoinGecko analysis, South Korea, Singapore, and Japan had the most 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 may explain the city-state’s high ranking on the list.

Singapore rolled out the welcome cart for crypto companies after the US began cracking down on initial coin offerings, most of which were unregistered securities offerings, in 2017. 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 stablecoin terraUSD.

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

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

Ismail with glasses, short haircut, suit with a pink and white striped tie
Ethikom Consultancy founder and CEO Nizam Ismail 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 moves are a step in the right direction but there are still gaps.

“Some pretty basic issues like segregation of client assets and proper disclosure need to be implemented immediately,” Ismail told Al Jazeera.

As for the future of crypto, industry watchers don’t see it going away entirely.

Some in the industry remain optimistic about the sector’s potential, even as they express outrage and disappointment at the impact 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, summarized in a lengthy Twitter thread earlier this month.

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

He added that “the crypto industry will end up largely relegated to the dark corners of the financial system as it slowly slides into insignificance.”

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