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.
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.
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.
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”.
