If you invest or trade cryptocurrencies, you probably have watched as the value of your holdings has declined throughout much of 2022. If you thought it couldn’t get much worse, the calendar flipped to November.
Early last month Coinbase reported on a series of red flags waving at the crypto exchange FTX and its affiliate company Alameda Research. The exchange suffered liquidity issues and millions of dollars in investors’ assets still can’t be accounted for.
Days later, a class-action lawsuit accused FTX founder and CEO Sam Bankman-Fried of creating a fraudulent cryptocurrency scheme to prey on unsophisticated investors, who had watched the value of Bitcoin and other digital currencies surge during the pandemic.
The House Financial Services Committee plans to hold hearings later this month on the FTX collapse. While the FTX drama plays out in the halls of Congress and federal courtrooms, people who own cryptocurrencies may be asking “what’s next?”
Regulation is coming
The industry experts we turned to have different opinions about how FTX’s collapse will affect digital assets but they all agree on one thing – regulation of the industry is coming.
“Regulation is the path to broader mainstream adoption,” Seamus Donoghue, chief growth officer at crypto management firm METACO, told ConsumerAffairs. “The era of market creators is over, ushering in the era of market definers that will help define the regulatory guardrails, security standards, and investor protections for a still nascent industry.”
FTX largely escaped U.S. scrutiny of its activities because it was not located in the U.S. It was headquartered in the Bahamas. Marshall Hayner, CEO of Metallicus, a blockchain and crypto firm, says that won’t work in the future.
“The days of regulatory arbitrage (using more favorable laws in one jurisdiction to circumvent less favorable regulation elsewhere) are about to close, and the regulated crypto world is coming, make no mistake,” he told us.
Shouldn’t be done too quickly
Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association, says effective regulation is going to take time and cooperation.
“There has been a lot of finger-pointing between industry and legislators/regulators – but appropriate regulation will take cooperation – almost a public/private partnership between government and industry – to provide effective, efficient and expedient regulation that works for the industry, the financial sector, the country and the public interest,” Kusz said.
Kusz is quick to point out that the failure of FTX wasn’t a failure of crypto or blockchain but instead was a result of how the exchange was run.
“It was a failure of risk management, governance, internal controls, and segregation of customer funds in a centralized financial (CeFi) digital asset enterprise,” Kusz said.
Peter Eberle, president and CIO of Castle Funds, a digital currency investment firm, agrees.
"FTX was fraud, plain and simple,” he told us. “Enron wasn’t about the energy business; it was about fraudulent accounting practices. Bernie Madoff's Ponzi scheme was not about stock hedge funds it was about fraud, and this same way FTX was a fraud and not an indictment of cryptocurrency.”
In the short run, Donoghue sees strong headwinds for the cryptocurrency industry, not only because of the scandal but also because of rising interest rates. The stimulus money that stuffed investors’ pockets during the pandemic, fueling some of the increase in cryptocurrency value, is gone.
“I expect to see far more unicorns that were focused on the disruption of traditional finance fall from grace,” Donoghue said. “Instead, we could see more collaborative fintech companies working with established institutions to accelerate the transition to a new financial stack, replacing the antiquated operational model currently in use with next-gen technology to power a future where every asset will be tokenized.”
Ahmed Ismail, CEO of FLUID, a company aimed at making the crypto world more efficient, says the FTX affair has highlighted the need to put regulation on the fast track.
“What we're witnessing now are reactionary measures that fall short of anything that could be deemed as regulation around the misuse of customer funds,” Ismail told ConsumerAffairs. “Despite market volatility, institutions recognize the opportunity crypto presents and the increase in institutional adoption of digital assets should underscore why regulation is needed now rather than later.”
Mark Fidelman, founder of SmartBlocks and host of the Cryptonized podcast, says the losses from FTX are staggering. He says the collapse has set back the industry, all because “these 10 people that did not follow any basic sort of financial principle or outline or didn't have a good handle of what was going on.”
Fidelman says the losses are so profound that he doesn’t see trust returning to the marketplace for at least a year.