‘Betrayed’: FTX meltdown signals end to crypto’s ‘Wild West’ days | Crypto

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Boston, Unit­ed States – FTX was one of the largest cryp­tocur­ren­cy exchanges in the world – until, ear­li­er this month, it fell apart in a mat­ter of days.

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

“The FTX col­lapse is attract­ing inter­na­tion­al notice,” David Ger­ard, a vocal crit­ic of the cryp­to sec­tor and the author of Attack of the 50 Foot Blockchain, told Al Jazeera.

“The reg­u­la­tors don’t care if cryp­to destroys itself. They do care if it affects any­body 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 sec­tor as traders pull their funds from any cen­tralised exchange they deem to be shaky.

Gen­e­sis Glob­al Cap­i­tal, the largest cryp­to lender, said it has $175m locked up in an FTX account and has report­ed­ly warned investors it could be forced to file for bank­rupt­cy if it can­not secure extra funding.

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

Crypto.com, a cryp­to exchange based in Sin­ga­pore, has faced high­er cus­tomer with­drawals after the company’s chief exec­u­tive acknowl­edged it had mis­han­dled a trans­ac­tion of rough­ly $400m. All in all, FTX, which has its head­quar­ters in the Bahamas, is believed to have as many as one mil­lion cred­i­tors, accord­ing to bank­rupt­cy filings.

Unlike cred­i­tors who will even­tu­al­ly get back some of their mon­ey through bank­rupt­cy, share­hold­ers typ­i­cal­ly end up get­ting zero. At least 80 com­pa­nies invest­ed $2bn into FTX, includ­ing a $400m round in Jan­u­ary valu­ing FTX at $32bn.

Temasek, one of Singapore’s two large sov­er­eign wealth funds, told its back­ers last week that it will be writ­ing down its full $275m invest­ment. Japan’s Soft­bank is expect­ing to write down $100m. Oth­er large investors include Sequoia, Black­Rock, Tiger Glob­al, Insight Part­ners and Paradigm.

Sam Bankman-Fried, smiling, in a grey t-shirt with a stylised light bulb on it
FTX founder Sam Bankman-Fried resigned as chief exec­u­tive after the cryp­to exchange filed for bank­rupt­cy [File: Hand­out via Reuters]

From the begin­ning, cryp­tocur­ren­cies have been a large­ly unreg­u­lat­ed indus­try. Off­shore cryp­to exchanges have oper­at­ed with near-zero over­sight, with investors hav­ing lit­tle vis­i­bil­i­ty of what goes on behind the scenes.

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

US Secu­ri­ties and Exchange Com­mis­sion (SEC) Chair Gary Gensler has been push­ing for greater cryp­to reg­u­la­tion since his nom­i­na­tion in April 2021. Last year, he described cryp­tocur­ren­cies as an asset class “rife with fraud, scams, and abuse”.

In FTX’s first bank­rupt­cy hear­ing on Tues­day, lawyers for the trou­bled cryp­to exchange accused Bankman-Fried, who resigned as chief exec­u­tive ear­li­er this month, of run­ning the com­pa­ny as a “per­son­al fief­dom”, with $300m spent on prop­er­ties for senior staff.

Bankman-Fried and FTX are cur­rent­ly being inves­ti­gat­ed by the US Jus­tice Depart­ment, the SEC and the Com­mod­i­ty Futures Trad­ing Com­mis­sion (CFTC).

For many indus­try observers, 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 has lob­bied US leg­is­la­tors for stronger cryp­to reg­u­la­tion, said the col­lapse of FTX could be likened to bank­ing giants such as JP Mor­gan or CitiBank dis­ap­pear­ing overnight – some­thing that would be dif­fi­cult to imag­ine fol­low­ing the intro­duc­tion of stricter reg­u­la­tion for banks in the wake of the 2007–2008 finan­cial crash.

“Finan­cial reg­u­la­tors will undoubt­ed­ly bring more enforce­ment cas­es against the indus­try in the US,” Diehl told Al Jazeera. “The public’s trust has been betrayed.”

Mar­tin Walk­er, bank­ing and finance direc­tor at the non-prof­it Cen­tre for Evi­dence-Based Man­age­ment, said the biggest effect of the col­lapse could be that the industry’s lob­by­ing efforts in Wash­ing­ton, DC find a less recep­tive audi­ence 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-biggest indi­vid­ual donor to Joe Biden dur­ing this 2020 elec­tion campaign.

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

Walker speaking at a podium with clicker in one hand
Mar­tin Walk­er of the Cen­tre for Evi­dence-Based Man­age­ment expects the cryp­to industry’s lob­by­ing efforts in Wash­ing­ton, DC to strug­gle going for­ward [Cour­tesy of Mar­tin Walker]

Hillary Allen, a pro­fes­sor at the Amer­i­can Uni­ver­si­ty Wash­ing­ton Col­lege of Law, said FTX’s fail­ure showed that bank­ing reg­u­la­tion has done a good job at pro­tect­ing tra­di­tion­al finance from crypto.

“There has been harm to cryp­to investors, but harm has not spread to oth­ers the way 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 tai­lored reg­u­la­to­ry regimes from scratch.

“If cryp­to prod­ucts and ser­vices can­not com­ply with exist­ing reg­u­la­tions, they should not exist,” she said.

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

South Korea, Sin­ga­pore and Japan had the great­est num­ber of users on FTX in that order, accord­ing to an 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 to crack down on ini­tial coin offer­ings, most of which were unreg­is­tered secu­ri­ties offer­ings, in 2017. Binance once described the city-state as a “cryp­to paradise”.

The Mon­e­tary Author­i­ty of Sin­ga­pore (MAS), how­ev­er, began to clamp down on cryp­to after a series of high-pro­file fail­ures in May – 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 unveiled pro­pos­als for new reg­u­la­to­ry mea­sures aimed at reduc­ing harm to cryp­tocur­ren­cy and sta­ble­coin users.

Ismail wearing glasses, with a short haircut, wearing a suit with a pink and white-striped tie
Ethikom Con­sul­tan­cy Founder and CEO Nizam Ismail says Singapore’s moves to reg­u­late cryp­tocur­ren­cies are a step in the right direc­tion [Cour­tesy of Nizam Ismail]

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

“Some quite fun­da­men­tal issues such as seg­re­ga­tion of client assets and prop­er dis­clo­sures must be put in place imme­di­ate­ly,” Ismail told Al Jazeera.

As for the future of cryp­to, indus­try watch­ers do not see it dis­ap­pear­ing completely.

Some in the space con­tin­ue to be opti­mistic about the sector’s poten­tial, even as they express out­rage and dis­ap­point­ment over the effect Bankman-Fried has had on its 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-cryp­to activist, said he expect­ed the pub­lic to be less patient towards 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”.

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