FTX was one of the largest cryptocurrency exchanges in the world, until earlier this month it collapsed in a matter of days.
In the wake of the collapse of Sam Bankman-Fried’s crypto empire, increased government scrutiny and calls for more regulation threaten to spell the end of the wild, wild west era for digital assets.
“The FTX collapse is drawing 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 destroy themselves. They care if it affects 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 United States, the implosion continues to reverberate across the industry as traders withdraw their funds from any centralized exchange they consider. be shaky
Genesis Global Capital, the largest cryptocurrency lender, said it has $175 million locked up in an FTX account and has reportedly warned investors it could be forced to file for bankruptcy if it is unable to raise additional funds.
Crypto lender BlockFi said it had “significant exposure” to FTX and is also warning of a potential bankruptcy filing.
Crypto.com, a Singapore-based cryptocurrency exchange, has been facing increased customer withdrawals after the company’s chief executive officer admitted he had mishandled an approximately $400 million transaction. In total, FTX, which is based in the Bahamas, is believed 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 usually end up getting zero. At least 80 companies invested $2 billion in FTX, including a $400 million round in January valuing FTX at $32 billion.
Temasek, one of Singapore’s two large sovereign wealth funds, told its backers last week that it will write down its total investment of $275 million. Japan’s Softbank expects to repay $100 million. Other big investors include Sequoia, BlackRock, Tiger Global, Insight Partners and Paradigm.
From the very beginning, cryptocurrency has been a largely unregulated industry. Offshore cryptocurrency exchanges have operated with almost zero oversight, and investors have little visibility into what is going on behind the scenes.
Over the past decade, the sector has seen the rise of larger crypto bubbles, followed by more spectacular crashes and higher losses.
US Securities and Exchange Commission (SEC) Chairman Gary Gensler has been pushing for greater regulation of cryptocurrencies since his April 2021 nomination. Last year, he described cryptocurrencies as a class of asset “full of fraud, scams and abuse”.
In FTX’s first bankruptcy hearing on Tuesday, lawyers for the troubled cryptocurrency exchange accused Bankman-Fried, who stepped down as chief executive earlier this month, of running the company as a “personal fiefdom,” with $300 million. 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 watchers, the wreckage left behind 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 tighter crypto regulation, said the collapse of FTX could be compared to the demise of banking giants like JP Morgan or CitiBank, something that would be hard to see. imagine after the introduction of stricter regulation for banks after the financial crisis of 2007-2008.
“Financial regulators will no doubt bring more enforcement cases against the industry in the US,” 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 audience. responsive after going into overdrive during the 2021 crypto bubble.
Bankman-Fried made $39 million in political donations during the most recent US election cycle and was the second largest individual donor to Joe Biden during this 2020 election campaign.
“All these failures in the cryptocurrency industry mean less money and less credibility for the cryptocurrency lobby in their efforts to bring about legislative changes that ‘legitimize’ rather than actually control endemic industry problems,” Walker told Al. Jazeera.
Hillary Allen, a professor at the American University of Washington School of Law, said that FTX’s failure showed that banking regulation has done a good job of protecting traditional finance from cryptocurrency.
“There has been damage to crypto investors, but the damage has not 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 setting up custom regulatory regimes from scratch.
“If crypto products and services cannot comply with existing regulations, they should not exist,” he said.
While FTX was run by an American and based in the Bahamas, its implosion has reverberated around the world, with some of the biggest consequences in Asia.
South Korea, Singapore, and Japan had the most users on FTX in that order, according to a CoinGecko analysis. After Binance, the largest cryptocurrency exchange, pulled out of Singapore last year, many cryptocurrency traders switched to FTX, which could explain the city-state’s high ranking on the list.
Singapore launched the welcome wagon for crypto companies after the US began cracking down on initial coin offerings, most of which were unregistered security offerings, in 2017. Binance once described the city -been as a “crypto-paradise”.
However, the Monetary Authority of Singapore (MAS) began to clamp down on cryptocurrencies after a series 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 cryptocurrency hedge fund Three Arrows Capital.
In October, MAS unveiled proposals for new regulatory measures aimed at reducing harm to cryptocurrency and stablecoin users.
Nizam Ismail, founder of Singapore-based Ethikom Consultancy, said the moves are a step in the right direction, but gaps still remain.
“Some fundamental issues, such as segregation of client assets and proper disclosures, need to be implemented immediately,” Ismail told Al Jazeera.
As for the future of cryptocurrency, industry observers don’t think it will go away completely.
Some in the space remain optimistic about the sector’s potential, even as they express outrage and disappointment at the effect Bankman-Fried has had on their image.
“These are 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-cryptocurrency activist, said he hoped the public would be less patient with regulators allowing safe havens for cryptocurrency companies with questionable business practices.
He added that eventually, “the crypto industry will be mostly relegated to the dark corners of the financial system as it slowly slides into irrelevance.”