‘Betrayed’: FTX Crash Signals End of ‘Wild West’ Days of Cryptocurrencies | Crypto

Boston, USA – FTX used to be one of the largest cryptocurrency exchanges in the world, until it collapsed within days earlier this month.

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

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

“Regulators don’t care if cryptocurrencies self-destruct. They care if it hits 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 US, the implosion continues to reverberate across the industry as traders withdraw their their funds from any centralized exchange they deem to be flaky.

Genesis Global Capital, the largest cryptocurrency lender, said it has $175 million locked up in an FTX account and reportedly warned investors it could be forced to file for bankruptcy if it is unable to secure funding extra.

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

Crypto.com, a Singapore-based cryptocurrency exchange, has faced a surge in customer withdrawals after the company’s CEO acknowledged mishandling an approximately $400 million transaction. All told, FTX, which is headquartered in the Bahamas, is thought to have up to a million creditors, according to bankruptcy filings.

Unlike creditors who will eventually get some of their money back through bankruptcy, shareholders typically end up getting 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 big sovereign wealth funds, told supporters last week that it will cancel its entire $275 million investment. Japan’s Softbank plans to write down $100 million. Other major investors include Sequoia, BlackRock, Tiger Global, Insight Partners and Paradigm.

FTX Founder Sam Bankman-Fried Steps Down as CEO After Crypto Exchange Files for Bankruptcy [File: Handout via Reuters]

From the beginning, cryptocurrencies have been a largely unregulated industry. Offshore cryptocurrency exchanges have operated with next to no oversight, with investors having little visibility into what goes on behind the scenes.

Over the past decade, the industry has seen the emergence of larger crypto bubbles, followed by more spectacular crashes and greater losses.

US Securities and Exchange Commission (SEC) Chairman Gary Gensler has pushed for more regulation of cryptocurrencies since his appointment in April 2021. Last year, he described cryptocurrencies as an asset class “riddled with fraud , scams and abuses”.

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

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 wreckage left behind by FTX is a wake-up call for regulators to do more to crack 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 banking giants like JP Morgan or CitiBank disappearing overnight – something that it would be hard to imagine after the introduction of stricter regulation for banks in the wake of the 2007-2008 financial crash.

“Financial regulators will no doubt bring more enforcement cases against the industry in the United States,” Diehl told Al Jazeera. “The public’s 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 could be that industry lobbying efforts in Washington, DC find a less receptive audience after they go in overdrive during the 2021 cryptocurrency bubble.

Bankman-Fried made $39 million in political giving during the last US election cycle and was Joe Biden’s second-largest individual donor during this 2020 campaign.

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

Walker speaking at a podium with clicker in one hand
Martin Walker of the Center for Evidence-Based Management Predicts Crypto Industry Lobbying Efforts in Washington, DC Will Have a Hard Time Moving Forward [Courtesy of Martin Walker]

Hillary Allen, a professor at the American University Washington College of Law, said the FTX failure demonstrated that banking regulation has done a good job of shielding traditional finance from cryptocurrencies.

“There has been damage to cryptocurrency investors, 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 establishing bespoke regulatory regimes from scratch.

“If cryptographic products and services cannot comply with existing regulations, they shouldn’t exist,” he said.

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

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

Singapore launched the welcome wagon for cryptocurrency companies after the US began cracking down on initial coin offerings, most of which were unregistered stock offerings, in 2017. Binance once described the city- been like a “cryptocurrency paradise”.

The Monetary Authority of Singapore (MAS), however, has begun cracking down on cryptocurrencies after a series of high-profile bankruptcies in May, including the collapse of Singapore-based Terraform Labs, the company behind stablecoin terraUSD.

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

In October, MAS presented proposals for new regulatory measures aimed at reducing harm to users of cryptocurrencies and stablecoins.

Ismail with glasses, short hair, suit with pink and white striped tie
Nizam Ismail, Founder & CEO of Ethikom Consultancy, Says Singapore’s Moves to Regulate Cryptocurrencies are Step in Right Direction [Courtesy of Nizam Ismail]

Nizam Ismail, the founder of Singapore-based Ethikom Consultancy, said the moves were a step in the right direction, but gaps remained.

“Some pretty fundamental issues like segregation of client assets and proper disclosure need to be put in place immediately,” Ismail told Al Jazeera.

As for the future of cryptocurrencies, industry observers don’t see it disappearing completely.

Some in the space continue to be 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 cryptocurrency 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 who allow safe havens for crypto companies with questionable business practices.

He added that eventually “the cryptocurrency industry will be mostly relegated to the dark corners of the financial system as it slowly slides into irrelevance.”

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