Boston, United States – FTX was one of the biggest cryptocurrency exchanges in the world – until earlier this month, it collapsed in a matter of days.
Following the collapse of Sam Bankman-Fried’s crypto empire, calls for increased government oversight and more regulation threaten the end of the free-wheeling, 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 the 50 Foot Blockchain attack, told Al Jazeera.
“Regulators don’t care if cryptocurrency destroys itself. They care if it affects someone else.”
Almost two weeks after FTX Trading Ltd – and more than 100 of its affiliated global entities, including trading arm Alameda Research – filed for bankruptcy in the US, the blast continues to reverberate through the sector as traders pull their money out of any centralized exchange they can think of . to be shaky.
Genesis Global Capital, the largest cryptocurrency lender, said it is holding $175 million in its FTX account and has warned investors that it will be forced into bankruptcy if it cannot secure additional funding.
Crypto lender BlockFi says it has “significant exposure” to FTX and is also warning of a possible bankruptcy filing.
Crypto.com, a Singapore-based cryptocurrency exchange, has faced more customer pushbacks after the company’s chief executive admitted to mishandling a nearly $400 million transaction. In all, Bahamas-based FTX is believed to have up to a million creditors, according to its bankruptcy filings.
Unlike creditors, who will get some of their money back through bankruptcy, shareholders typically get 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 largest sovereign wealth funds, said last week it would fully write down its $275 million investment in its backers. Japan’s “Softbank” expects to write off $100 million. Other major investors include Sequoia, BlackRock, Tiger Global, Insight Partners and Paradigm.
From the beginning, cryptocurrencies have been a largely unregulated industry. Offshore cryptocurrency exchanges operate with near-zero oversight, with investors seeing very little of what goes on behind the scenes.
Over the past decade, the sector has seen the emergence of bigger cryptocurrencies, followed by more spectacular crashes and bigger losses.
US Securities and Exchange Commission (SEC) Chairman Gary Gensler has been pushing for broader cryptocurrency regulation since his nomination in April 2021. Last year, he described cryptocurrencies as an asset class “rife with fraud, fraud and abuse.”
At the FTX’s first bankruptcy hearing on Tuesday, lawyers for the troubled cryptocurrency exchange accused Bankman-Fried, who resigned as chief executive earlier this month, of running the company as a “personal robbery” by spending $300 million on properties for high-level employees.
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 devastation left by FTX is a wake-up call for regulators to do more to clamp down on the space.
Stephen Diehl, a computer programmer who has lobbied US lawmakers for stronger cryptocurrency regulation, said the collapse of FTX could be likened to the overnight disappearance of banking giants like JP Morgan or CitiBank — which would be hard to imagine after stricter regulation. Banks after the financial crisis of 2007-2008.
“Financial regulators will certainly be doing more enforcement against the industry in the US,” Diehl told Al Jazeera. “The trust of the people was betrayed”
Martin Walker, director of banking and finance at the nonprofit Center for Evidence-Based Management, said the biggest impact of the collapse may be that the industry’s lobbying efforts in Washington find a less receptive audience after the 2021 cryptocurrency overload. bubble.
Bankman-Fried made $39 million in political donations during the most recent US election cycle, making him Joe Biden’s second-largest individual donor during the 2020 campaign.
“All these failures in the crypto industry mean less money and less credibility in the crypto lobby’s efforts to make legislative changes, rather than actually controlling the industry’s endemic problems,” Walker told Al Jazeera.
Hillary Allen, a professor at American University’s Washington College of Law, said the FTX’s failure shows that banking regulation is doing a good job of protecting traditional finance from cryptocurrency.
“Crypto investors have been hurt, but the damage has not spread to others like it did in 2008,” Allen said, 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 tailored regulatory regimes from scratch.
“Crypto products and services should not exist if they do not comply with existing regulations,” he said.
While the FTX is led by an American and based in the Bahamas, its explosion has reverberated globally, with some of the biggest strikes in Asia.
According to CoinGecko’s analysis, South Korea, Singapore and Japan have the highest number of users on FTX in that order. After Binance, the largest cryptocurrency exchange, was pulled out of Singapore last year, many crypto traders switched to FTX, which may explain the city-state’s high ranking on the list.
After the US began cracking down on initial coin offerings in 2017, most of which were unregistered securities offerings, Singapore has provided a welcome bandwagon for crypto companies. Binance once described the city-state as a “crypto paradise”.
However, the Monetary Authority of Singapore (MAS) began cracking down on the cryptocurrency in May after a series of high-profile failures — including the collapse of Singapore-based Terraform Labs, the company behind the terraUSD stablecoin.
The collapse of terraUSD, which was supposed 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 presented proposals for new regulatory measures aimed at reducing harm to cryptocurrency and stablecoin users.
Nizam Ismail, the founder of Singapore-based Ethikom Consultancy, said that these steps are a step in the right direction, but gaps still remain.
“Some very fundamental issues such as segregation of client assets and proper disclosures need to be done immediately,” Ismail told Al Jazeera.
When it comes to the future of cryptocurrency, industry observers don’t see it completely disappearing.
While some in the space have expressed anger and disappointment over Bankman-Fried’s impact on its image, they remain optimistic about the sector’s potential.
“These are growing pains. It’s possible to make money again,” Jesse Power, founder of US cryptocurrency Kraken, concluded in a lengthy Twitter post earlier this month.
But Diehl, an anti-crypto activist, said he expects the public to be less patient with regulators who provide safe havens for crypto companies with questionable business practices.
Eventually, he added, “the crypto industry will mostly end up in the dark corners of the financial system as it slowly slides into irrelevance.”