Boston, United States – FTX used to be one of the largest cryptocurrency exchanges in the world – until earlier this month it collapsed within days.
In the wake of the collapse of Sam Bankman-Fried’s crypto empire, increased government oversight and calls for tougher regulation threaten to spell the end of the freewheeling Wild West era for digital assets.
“FTX’s collapse is attracting international attention,” David Gerard, an outspoken crypto industry critic and author of Attack of the 50 Foot Blockchain, told Al Jazeera.
“Regulators don’t care if crypto gets destroyed. They care if it affects someone else.
Almost 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 Statesthe implosion continues to reverberate throughout the sector as traders withdraw their funds from any centralized exchange they deem fragile.
Genesis Global Capital, the largest crypto lender, said it had $175 million locked away in an FTX account and allegedly warned investors that it could be forced to file for bankruptcy if he cannot obtain additional financing.
Crypto lender BlockFi said it has “significant exposure” to FTX and is also warning against a potential bankruptcy filing.
Crypto.com, a Singapore-based crypto exchange, faced higher customer withdrawals after the company’s chief executive admitted mishandling a roughly $400 million transaction. In total, Bahamas-headquartered FTX has up to a million creditors, according to bankruptcy filings.
Unlike creditors who will end up getting some of their money back through bankruptcy, shareholders usually end up getting zero. At least 80 companies have invested $2 billion in FTX, including a $400 million round in January valuing FTX at $32 billion.
Temasek, one of Singapore’s two major sovereign wealth funds, told its backers last week that it would cancel its entire $275 million investment. Japan’s Softbank expects to write down $100 million. Other big investors include Sequoia, BlackRock, Tiger Global, Insight Partners and Paradigm.
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 is going on behind the scenes.
Over the past decade, the industry has seen the emergence of bigger crypto bubbles, followed by bigger busts and bigger losses.
U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has been pushing for greater crypto regulation since his appointment in April 2021. Last year, he described cryptocurrencies as a asset class “filled with frauds, scams and abuse”.
At 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 like a “personal fief”, with $300 million spent on properties 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 watchers, the wreckage 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 lobbied US lawmakers for tougher crypto regulation, said the collapse of FTX could be compared to the disappearance of banking giants such as JP Morgan or CitiBank overnight. – something that would be difficult to imagine following the introduction of stricter regulation for banks following the financial crash of 2007-2008.
“Financial regulators will undoubtedly bring more lawsuits against the industry in the United States,” Diehl told Al Jazeera. “The public trust has been betrayed.
Martin Walker, director of banking and finance at the nonprofit Center for Evidence-Based Management, said the biggest effect of the collapse may be that industry lobbying efforts in Washington, D.C. find a less receptive audience. after being overdrive during the 2021 crypto bubble.
Bankman-Fried made $39 million in political donations during the last U.S. election cycle and was Joe Biden’s second-largest individual donor this 2020 campaign.
“All of these failures in the crypto industry mean less money and less credibility for the crypto lobby in its efforts to secure legislative changes that ‘legitimize’ rather than truly control the industry’s endemic problems. “Walker told Al Jazeera.
Hillary Allen, a professor at American University Washington College of Law, said FTX’s failure shows that banking regulations have done a good job of protecting traditional finance from crypto.
“There has been harm to crypto investors, but the harm hasn’t spread to others like it did in 2008,” Allen told Al Jazeera, referring to the global recession that followed the crisis. Collapse of Lehman Brothers.
Allen said that while the public would benefit from increased enforcement, governments should avoid building tailor-made regulatory regimes from scratch.
“If crypto products and services can’t comply with existing regulations, they shouldn’t exist,” she said.
While FTX was American-led and Bahamas-based, its implosion reverberated around the world, with some of the biggest fallout in Asia.
South Korea, Singapore, and Japan had the most users on FTX in that order, according to analysis by CoinGecko. 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, most of which were unregistered securities offerings, in 2017. Binance previously described the city-state as a “crypto haven”.
The Monetary Authority of Singapore (MAS), however, began cracking down on crypto after a string of high-profile failures in May, including the collapse of Singapore-based Terraform Labs, the company behind the stablecoin terraUSD.
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 unveiled proposals for new regulatory measures aimed at reducing harm to users of cryptocurrency and stablecoins.
Nizam Ismail, the founder of Singapore-based Ethikom Consultancy, said the moves are a step in the right direction, but gaps remain.
“Some pretty basic issues like segregation of client assets 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 completely disappearing.
Some in the space continue to be optimistic about the sector’s potential, even as they express outrage and disappointment at the effect Bankman-Fried has had on its image.
“It’s 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 expects the public to be less patient with regulators who allow safe havens for crypto companies with questionable business practices.
He added that eventually, “the crypto industry will mostly be relegated to the dark corners of the financial system as it slowly slides into irrelevance.”