Boston, USA — FTX was one of the biggest cryptocurrency exchanges in the world — until it fell apart within a few days earlier this month.
Following the collapse of Sam Bankman-Fried’s crypto empire, tightened government controls and demands for greater regulation threaten to spell the end of the Wild West era for digital assets.
“The FTX collapse is attracting international attention,” David Gerard, a vocal critic of the crypto sector and author of Attack of the 50 Foot Blockchain, told CNN Breaking News.
“Regulators don’t care whether crypto self-destructs. They don’t care if it affects anyone else.”
Nearly two weeks after FTX Trading Ltd — and its more than 100 affiliated global companies, including trading arm Alameda Research — filed for bankruptcy in the United States, the implosion continues to reverberate across the industry as traders draw their money from every central exchange they find shaky.
Genesis Global Capital, the largest crypto lender, said it had frozen $175 million in an FTX account and has reportedly warned investors that it could be forced to file for bankruptcy if it is unable to receive additional funding.
Crypto lender BlockFi said it had “significant exposure” to FTX and is also warning of a potential bankruptcy filing.
Crypto.com, a crypto exchange based in Singapore, saw higher customer withdrawals after the company’s managing director admitted to mishandling a transaction worth around $400 million. Overall, it is assumed that FTX, which is headquartered in the Bahamas, has up to one million creditors, according to bankruptcy filings.
Unlike creditors, who get some of their money back at some point as a result of bankruptcy, shareholders generally receive zero. At least 80 companies invested $2 billion in FTX, including a $400 million round in January that valued FTX at $32 billion.
Temasek, one of Singapore’s two major sovereign wealth funds, told its backers last week that it would write off its entire $275 million investment. Japanese Softbank expects to write off $100 million. Other major investors include Sequoia, BlackRock, Tiger Global, Insight Partners and Paradigm.
From the outset, cryptocurrencies have been a largely unregulated industry. Offshore crypto exchanges have operated with almost no oversight, and investors had little overview of what was going on behind the scenes.
In the last ten years, larger crypto bubbles have emerged in this sector, followed by more spectacular dips and larger losses.
Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), has been pushing for stronger crypto regulation since his nomination in April 2021. Last year, he described cryptocurrencies as an asset class that is “full of fraud, fraud, and misuse.”
In FTX’s first bankruptcy hearing on Tuesday, lawyers accused troubled crypto exchange Bankman-Fried, which resigned as managing director earlier this month, of running the company as a “personal fief,” with $300 million spent on real estate for senior employees.
Bankman-Fried and FTX are currently being investigated by the US Department of Justice, the SEC, and the Commodity Futures Trading Commission (CFTC).
For many industry observers, the debris FTX left behind is a wake-up call for regulators to do more to take action against space.
Stephen Diehl, a computer programmer who has lobbied US lawmakers for stronger crypto regulation, said the collapse of FTX could be compared to the disappearance of banking giants like JP Morgan or CitiBank overnight — something that would be hard to imagine following the introduction of stricter regulation for banks following the 2007-2008 financial crash.
“Financial regulators will undoubtedly launch more enforcement proceedings against the industry in the US,” Diehl told CNN Breaking News. “The public’s trust has been betrayed.”
Martin Walker, banking and finance director of the nonprofit Center for Evidence-Based Management, said the biggest effect of the collapse could be that industry lobbying in Washington, DC, finds a less open-minded audience after they get into overdrive during the 2021 crypto bubble.
Bankman-Fried earned $39 million in political donations during the last U.S. election cycle and was the second-largest single donor to Joe Biden during the 2020 election campaign.
“All of these failures in the crypto industry mean less money and less credibility for the crypto lobby in its efforts to make legislative changes that ‘legitimize’ the industry’s endemic problems rather than actually controlling them,” Walker told CNN Breaking News.
Hillary Allen, a professor at American University’s Washington College of Law, said the failure of FTX showed that banking regulation had done a good job protecting traditional finances from crypto.
“Crypto investors were harmed, but the damage didn’t spread to others as it did in 2008,” Allen told CNN Breaking News, referring to the global recession following the collapse of Lehman Brothers.
Allen said that while the public would benefit from increased enforcement, governments should avoid creating tailored regulatory systems from scratch.
“If crypto products and services can’t comply with existing regulations, they shouldn’t exist,” she said.
FTX may have been run by an American and based in the Bahamas, but its implosion has had a worldwide impact, with some of the biggest consequences in Asia.
According to analysis by CoinGecko, South Korea, Singapore, and Japan had the most users on FTX, in that order. After Binance, the largest crypto exchange, withdrew from Singapore last year, many crypto traders switched to FTX, which could explain the city-state’s high ranking on the list.
Singapore introduced the welcome car for crypto companies after the US began cracking down on initial coin offerings in 2017, most of which were unregistered securities offerings. Binance once described the city-state as a “crypto paradise.”
However, the Monetary Authority of Singapore (MAS) began cracking down on crypto after a series of serious failures in May — including the collapse of Singapore-based Terraform Labs, the company behind the TerraUSD stablecoin.
The collapse of TerraUSD, which should be pegged to the US dollar, and Terraform’s lending platform Anchor have brought several other companies to a standstill, including Singapore-based crypto hedge fund Three Arrows Capital.
In October, MAS presented proposals for new regulatory measures to reduce the damage to cryptocurrency and stablecoin users.
Nizam Ismail, founder of Singapore-based Ethikom Consultancy, said the steps were a step in the right direction, but gaps remain.
“Some very fundamental issues, such as segregation of customer assets and proper disclosure, need to be addressed immediately,” Ismail told CNN Breaking News.
As for the future of crypto, industry observers aren’t seeing it completely disappear.
Some in the industry remain optimistic about the industry’s potential, even as they express outrage and disappointment about Bankman-Fried’s impact on the industry’s image.
“It’s growing pains. Money can be earned again,” summarized Jesse Power, founder of US crypto exchange Kraken, in a lengthy Twitter thread earlier this month.
However, Diehl, the anti-crypto activist, said he expected the public to be less patient with regulators that provide safe havens for crypto companies with questionable business practices.
He added that “at some point, the crypto industry will mostly be relegated to the dark corners of the financial system as it slowly becomes irrelevant.”