The FTX bankruptcy filing on Friday last week culminated in a run on customer deposits that exposed deep fissures in the cryptocurrency market. After a CoinDesk report revealed that FTX’s financial stability provided by hedge fund Alameda Research was simply an investment in FTX-created FTT tokens, Binance announced that it was selling off its $580 million investment in FTX, setting off a major selloff. This not only resulted in FTX’s over $30 billion collapse and the resignation of its founder, Sam Bankman-Fried, but opened the door for now-ongoing Justice Department and Securities and Exchange Commission investigations. This has done little, however, to stem a spreading crypto contagion.
Even after Bitcoin and Ethereum lost more than 70% from their peak values over the last year, Forbes reports that JPMorgan analysts warned that the FTX fallout could result in another 25% drop in value (simultaneously announcing further investment in crypto). Meanwhile, cryptocurrency lender BlockFi Inc. halted customer withdrawals after conceding “significant exposure” to FTX (per The Wall Street Journal). The crypto creditor now plans large layoffs while Blockfi bankruptcy may be around the corner.
Given the current crisis and massive investor losses, the crypto market faces an uncertain future that will involve federal regulation for the first time. Despite the crisis, cryptocurrency still represents a digital frontier that circumvents government fiat currency and protects transactions through blockchain technology that provides unique, anonymous transactions with digital imprints. Here, crypto industry leaders weigh in on what the future may hold after the fall of FTX and Luna bared the catastrophic risk involved with the digital currency. Not surprisingly, these crypto leaders have a more optimistic take on the industry’s future than people like Michael Burry; instead of a total collapse, they believe we’re at the start of a new era for crypto.
Crashes reveal crypto’s true intention
While billions in dollars for hundreds of thousands of investors is a horrific consequence, Jonathan Zeppettini, strategy lead and chief evangelist for the Decred cryptocurrency, proselytizes for the future of blockchain tender.
“If anything, the fallout highlights the importance of the foundational principles of cryptocurrency: that they allow for disintermediation and self-custody of assets,” Zeppettini wrote to The Manual.
In plain English, what this means is that crypto is designed as a medium of exchange between two parties while cutting out the middleman, aka, government issuers of currency. They are not meant to be blind speculative investments or depository instruments, Zeppettini asserts.
“There’s no reason to be leaving coins on exchanges and treating them like banks,” Zeppettini wrote.”Bitcoin and other crypto-assets empower individuals to have control of their own money and it’s worth investing time and effort into gaining sovereignty over your property.”
Scams encourage necessary utility
FTX fell from an over $30 billion valuation to just over $1 billion in less than a week (according to CNN). The popularity of the crypto platform was buoyed by investments from celebrities like LeBron James and Larry David, mega investors like BlackRock and Sequoia Holdings, and even naming rights to professional stadiums. Alas, none of this hubbub added up to financial security. The massive failure of FTX may lead to less reliance on name brands and more capital-backed conviction, according to Eduardo Ibanez, scientist at crypto travel platform Life.
“People will always speculate and act irrationally on news,” Ibanez wrote. “I believe this is a good turning point for crypto and you’ll begin to see more utility value-add-based projects that provide immediate value arising from this versus projects that relied wholeheartedly on marketing.”
Utility can be translated to use, in this case. Ibanez believes that FTX has led to a better market for “future asset/utility-backed projects.”
Better risk scrutiny
The interesting aspect of this awful situation is that while many investors are traumatized, left holding the bag for FTX, and the subsequent crypto market is plunging due to the fallout, crypto industry insiders are optimistic. People like Rishabh Gupta, director of operations at the Web3 incubator and consultant TdeFi, are encouraged that the crypto cream will rise to the top.
“This fiasco is a reminder that decentralized platforms with well-structured governance structures are the future of crypto,” Gupta wrote. “The premise of DeFi has been strengthened by this collapse of entities lacking counterpart risk measures.”
The “risk” of FTX was that it was backed by its own coin — a classic trap. Gupta, however, does not view government oversight as a long-term solution.
“Regulations can be a short-term fix to the problem, but that won’t bring the necessary mindset shift. In fact, hard regulations will stumble innovation,” Gupta wrote.
Stricter government regulation
Giorgi Khazaradze, CEO of the crypto platform and ecosystem, Aurox, disagrees with Gupta’s assessment of governmental oversight.
“The government needs to implement strict regulation against custodial services and exchanges, the same way they do with banks,” Khazaradze wrote. “Users also need to revert back to the core values of cryptocurrency — which is decentralization.”
In this case, the United States Office Comptroller of the Currency defines “custodial services” as “settlement, safekeeping, and reporting of customers’ marketable securities and cash.” Instead of banks holding and keeping money and securities safe for customers, Bitcoin was created to circumvent financial institutions that have failed investors when the money became too sweet. The 2008 real estate crash, for example, was caused by bundling together high-risk mortgages until the collapse of those insecure mortgages led to a catastrophic failure.
“Crypto was created to give users control over their own assets. We are witnessing a dramatic shift from custodial services to decentralization, which is great for crypto. A lot of trust has been lost in the general public from what FTX did, and that will take a while to rebuild. But with regulation, that trust can be rebuilt,” Khazaradze wrote.
A better future?
What is guaranteed to happen is more government involvement in the crypto industry. That’s already happening. Avarice and emotion, however, ensure that another FTX-level disaster is all too possible.
Aaron Rafferty, CEO of BattlePacs and co-founder at StandardDAO, a Web3 infrastructure firm, is a six-year veteran of the blockchain space. Employing his career “understanding societal behaviors and how they influence financial outcomes,” Rafferty neatly sums up the current situation.
“While crypto should not entirely mimic the regulations of the traditional finance space, there are fundamental principles to apply that will protect customers against negligence and/or fraud,” Rafferty wrote. “Blockchain was built upon #decentralization, #transparency, and #utility. The only way forward will be with teams who embed these values into their core technologies and corporate structures.”
