The crypto industry is still reeling from the effects of FTX

28 February 2023 5 min. read
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The FTX scandal in 2022 has rocked the crypto world, and the subsequent fallout is something that is going to be talked about for a long time in finance circles. While there is no doubt that the saga will continue to impact the industry throughout 2023 and the cryptocurrency scene will need time to recover, the current state suggests the sector will rebound in stronger shape.

Even though the world’s stock markets have had a strong start to 2023, the price action of cryptocurrencies has lagged behind. For short-term investors, this is posing them with an investment dilemma.

But for those investors who are in crypto for the long term, this is not something that worries them too much. They expect that the FTX scandal, as well as other crashes such as Celsius Network and Voyager Digital, will flush out less serious operations from the entire crypto ecosystem.

The crypto industry is still reeling from the effects of FTX

2023 has however shown recovery. Total crypto market capitalisation jumped but a few hundred million since the FTX collapse in early November 2022, with both the price of Bitcoin and altcoins steadily increasing.

What good can come out of the FTX scandal? 

While it may seem contradictory that something positive can come out of a situation where so many regular people have lost large amounts of money (billions of dollars in assets were wiped out following the crash, exactly how much is still not entirely known), the FTX sage also is anticipated to bring some positives.

“The good that will come out of this is stricter rules and more oversight for exchanges,” said an expert close to the matter on the basis of anonymity.

While crypto might according to many be designed to stand outside of the regular financial regulatory practices, the companies handling assets need to be closely regulated. Meanwhile, the entire sector also needs to have proper governance and oversight, to ensure that investors are protected and excessive risk-taking is curbed.

The other good: more regulation and oversight can ensure that anti-money laundering practices are followed, with several crypto platforms accused of taking a laissez-faire policy on their customer due diligence processes.

Cautious about exchanges 

The collapse of FTX and the entire fallout – and the misappropriation of customer funds – has made people and institutional investors such as hedge funds more cautious about using exchanges built for crypto.

One of the strongest appeals of crypto is the fact that the person who owns the coins is the only one who can access and control them. While a plus from an ownership and financial autonomy perspective, this at the same time has always been an achilles heel of the exchanges.

According to one 2022 study, 35% of consumers worldwide perceive cryptocurrencies as a scam, with many respondents pointing at initial coin offerings that are ‘pumped and dumped’ and at crypt exchanges that are not transparent about the financial risks they take.

FTX was a classical example in this regard, with the company mismanaging its funds and not holding back enough funds to cover for volumes of withdrawals from rattled investors. “The stunning collapse of FTX was an age-old story of financial mismanagement, excessive risk-taking and insufficient regulation and risk management,” said Clifford Rossi, a Professor at the Robert H. Smith School of Business, University of Maryland.

Will regulations come from this? 

The FTX scandal has accelerated the call for more regulation on the crypto sector. In the UK for instance, the government last month announced plans for new rules governing the issuance, lending and trading of crypto tokens. If implemented, crypto exchanges would have to ring fence retail funds in the face of insolvency, while undertaking due diligence and monitoring of assets listed on their platform.

In other markets such as the US, Hong Kong and Singapore, regulators are working on similar plans with the aim of building more transparency and accountability in the system, while providing investors with better protection.

In parallel, governments are also more actively clamping down illicit behaviour. In the US alone, two major crypto platforms received a financial penalty last week, with Kristin Smith, the executive director of the Blockchain Association, a crypto industry trade group, even going so far to describe recent enforcement action as “crypto carpet bombing”.

Crypto coins, platforms and investors have meanwhile been quick to build trust around their financials. Binance, one of the biggest exchanges, came out and deflected rumours that they were in a liquidity crisis. In the Netherlands, Bitvavo did something similar after rumours surfaced it has lost up to $280 million in investor assets due to its financial involvement in the FTX crash.

For many, including those in the industry itself, the entry of more regulation is being welcomed, as it might entice newer investors who feel proper oversight can build more trust. Yet at the same time, some staunch opponents of regulation emphasize that it goes against the spirit of crypto, and the very reason why crypto currencies were incepted in the first place.