Three ways the FTX disaster will change crypto
The The collapse of FTX, once a $32 billion crypto exchange, has destroyed investor confidence in cryptocurrencies. Market players are trying to assess the extent of the damage it will cause – and how it will shape the industry in the coming years.
Sam Bankman-Fried, the former FTX boss who resigned on November 11, was was arrested in the Bahamas last week. The US government has indicted him for bank fraud, securities fraud and money laundering.
FTX connected buyers and sellers of digital currencies such as Bitcoin, as well as derivatives. However, the company did more than that, allegedly dipping into customer accounts to do so risky trades through its sister company Alameda Research.
“It’s a huge disappointment 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 change crypto in the coming years. Here are three big ways the industry could change.
1. Setting
First, disaster seems certain to spur regulators into action.
The crypto industry is still largely unregulated, which means investors don’t have the same protections as if they were investing their funds in a licensed bank or broker.
That might be changing. The governments of the United States, the European Union and the United Kingdom are taking steps to clean up the market.
If there is no regulation, investors will be left without the protection they need.
Louise Abbott
Partner, Keystone Law
of the EU Crypto asset market is the most comprehensive regulatory framework to date. It aims to reduce risks for consumers making cryptocurrency purchases and make exchanges accountable if they lose investors’ assets.
But MICA is scheduled to start only after 12 months. Keystone Law’s Abbott said it’s important for regulators to act quickly.
“People need to see that there are steps being taken to regulate it. And I think if we can provide regulation, we will build trust,” he said. “If there is no regulation, investors will be left without the protection they need.”
According to Evgeny Gaevoy, founder and CEO of crypto market maker Wintermute, the saga has delayed the adoption of cryptoassets by “one or two years.”
“Everything that failed this year, if you look at Celsius, Three Arrows, FTX – all those guys took the worst of both worlds because they weren’t fully decentralized and they weren’t properly centralized,” he said.
For Kevin de Patoul, CEO of crypto market maker Wintermute, the biggest lesson from FTX’s bankruptcy is that “you can’t have complete centralization and a lack of control.”
“We are evolving into a world of both centralization and decentralization,” he said. “When you have that concentration, you have to have the proper oversight and the right balance of power.”
2. Consolidation
I don’t think all the dominoes have fallen from the contagion. The effect this will have is that there will be absolutely no funds for many projects…
Marieke Flament
CEO, Near Foundation
“The challenge for the whole space when you think about contagion is that FTX and Alameda were very active investors in this space,” Peter Smith, CEO of Blockchain.com, said in a CNBC-moderated speech at a crypto conference in London.
The Near Foundation, which is behind a blockchain network called Near, was one of the companies that took investment from FTX. Marieke Flament, CEO of Near, said the firm had limited exposure to FTX – although the collapse was still a “surprise and shock”.
“I don’t think all the dominoes have fallen on the contagion,” Flament said. “The effect of this is that many projects really do not have the funds and thus the resources to continue and develop.”
Fears have increased about the financial situation of other major crypto exchanges since the failure of FTX. Since 2020, about 900,000 bitcoins have flowed out of exchanges, according to data from CryptoQuant.
Binance, the world’s largest exchange, is facing questions about the reservations it takes to secure customer funds. The company saw billions of dollars in outflows last week.
There is currently no reason to suspect that Binance is facing bankruptcy. But exchanges like Binance and Coinbase there is a gloomy market situation ahead as trading volumes and account balances decrease.
Experts believe they will continue to play a role – although their survival will depend on how seriously they take risk management, governance and regulation.
“There will be trades that do things right and that will survive,” Abbott said.
As for tokens – Bitcoinwhich is the longest-lived digital currency, may be in a better position than its smaller competitors.
“My bet would be Bitcoin and DeFi [decentralized finance] has been decoupled from the rest of crypto and is actually taking on a life of its own,” Gaevoy of Wintermute told CNBC.
3. Innovation
Despite the depressed state of the crypto market and the resulting tax fallout for investors, the digital asset industry is likely to survive.
“” supportersWeb3“, a hypothetical blockchain-based internet, expect the crypto winter of 2022 to pave the way for more innovative uses of the blockchain, rather than the speculative uses of crypto associated today.
“We see a lot of companies that have digital innovation arms or metaversal innovation departments,” Flament said. “They understand the technology is here. It’s not going away.”
NFTs, or non-fungible tokens, can change users’ relationships with features such as games and events. These are digital assets that track the ownership of unique virtual objects on the blockchain.
“Digital assets are going to be a growing part of our lives, whether it’s a collectible, ticket, value or identity,” Ian Rogers, chief experience officer at crypto wallet company Ledger, told CNBC. “Identity could be membership… [people] using the NFTs they own to access a certain event or similar.”
But many still have a learning curve to overcome. “Creating wallets and storing keys and going through different platforms is difficult,” Cordel Robbin-Coker, CEO of mobile game company Carry1st, told CNBC at the Slush startup conference in Helsinki.
Robbin-Coker compared today’s Web3 to the Internet of the early 90s. “It was clunky. You had a dial-up connection, it took four minutes to access, the original browsers weren’t very intuitive,” he said.
“Early adopters really commit at that point. But over time, companies are building smoother interfaces. And they’re cutting out steps.”