One year after FTX imploded, here’s how crypto is changing

“The worst day of my career, and one of the worst days of my life – the day FTX froze withdrawals,” as Travis Kling, who runs Ikigai Asset Management, described it in a series of tweets on 7 November. after that, the Sam Bankman-Fried exchange filed for bankruptcy, arguably the darkest days in crypto history.

“The first weeks were really brutal. I didn’t sleep much at all. Feelings of terror, guilt and shame. We eliminated most of the staff,” Kling wrote.

A year later, the industry has changed irrevocably – and at the same time in many ways very familiar.

It’s mostly the giddy day traders and the abundant leverage that drove Bitcoin to its November 2021 high near $69,000. Ditto for celebrities and social media influencers who are picking up tokens and memecoins that aren’t putable. Regulators determined not to be caught off guard again are tightening their grip. And large financial firms like BlackRock Inc. is moving in, attracted by the prospect of the US Securities and Exchange Commission giving its first blessing to an ETF investing directly in Bitcoin.

Perhaps the most tangible indicator that crypto has moved forward: Bitcoin has recovered all its losses since the May 2022 implantation of the stablecoin TerraUSD, which started the wave of failures that helped bring FTX down in the end.

“People have short memories,” said Jeff Dorman, chief investment officer with asset manager Arca.

Read more: Bitcoin Rallies After Terra Crash Level in Victory over Bruised Bulls

Some observers see an industry still plagued by rampant speculation and inadequate safeguards. The Tether stablecoin, a pillar of the sector that has long languished amid speculation about the quality of the assets backing it and allegations that it is being used by criminals, has come to the fore in recent months. Binance, the largest exchange, still operates without a formal headquarters.

“The industry primarily provides assets that can be created out of thin air with values ​​that are incredibly important,” said Hilary Allen, a law professor at the American University of Washington College of Law who has written about crypto’s impact on financial stability. you still see crypto exchanges performing brokerage activities – with all the conflicts of interest that come with it – and there are still allegations of exchanges pooling customer assets.”

Here are some of the ways crypto has changed since the fall of FTX.

The Market

By the time FTX went down, the crypto market was already months into the rout claimed by TerraUSD, hedge fund Three Arrows Capital and lender Celsius Network. But the fall of FTX, once one of the top crypto exchanges by trading volume, was even more damaging, according to Aaron Brown, a crypto investor who writes for Bloomberg Opinion.

“FTX was just the culmination of a year where crypto credit collapsed,” he said.

The number of OTC desks has declined, and mainly the more conservative ones that remain, according to Tegan Kline, co-founder of Edge & Node, which developed a crypto project called The Graph. That, combined with erosion of leverage, has sapped liquidity.

“The leverage is gone,” Kline said. “A lot of people have pulled money out of the system or have money stuck at FTX.”

Several crypto exchanges have launched new lending programs in recent months, and several more lending projects are expected to start soon, hoping to fill the gap. The approval of a Bitcoin ETF could also help increase liquidity.

One of the hardest crypto corners is NFTs, popularized by collections such as Bored Ape Yacht Club cartoon primates and CryptoPunks pixelated characters. Weekly trading in NFTs has fallen to half of what it was when FTX went bankrupt.

Regulators

Like any previous event, the FTX crash awakened governments around the world to the need for tighter guardrails around crypto. In short, the SEC and the Commodity Futures Trading Commission went after top exchanges like Binance (along with CEO Changpeng “CZ” Zhao), Coinbase Global Inc. and Kraken.

“Regulatory bodies have tightened their oversight of centralized exchanges since the collapse of FTX,” said Jacob Joseph, a research analyst at crypto analytics firm CCData.

The European Union adopted its Regulation of Markets in Crypto-Assets in May, providing a new legal framework for the industry. Both Hong Kong and Dubai introduced crypto regulatory regimes over the summer, promising to crack down on the bad behaviour, positioning themselves as new hubs for the industry. At the same time, regulators around the world kept clamping down on Binance, which left countries like Canada and the Netherlands under pressure.

Zhao is not the only crypto leader to find himself in the crosshairs. In July, a year after Celsius filed for bankruptcy, former CEO Alex Mashinsky was arrested and charged with fraud (he pleaded not guilty). A week ago, Bankman-Fried was convicted on seven counts of fraud and conspiracy after a month-long trial that pitted the testimony of the former crypto king against that of some of his closest friends.

“This guilty verdict shows that the perpetrators of these types of scams will eventually face the law and suffer the consequences of their crimes, even in crypto,” said Cory Klippsten, CEO of financial services firm Bitcoin Swan.

Venture capital

During the heady days of 2021 and early 2022, venture capitalists were the biggest cheerleaders in the industry, pouring billions of dollars into startups. But the fall of FTX prompted a hasty retreat, with crypto venture funding falling 63% to $2 billion in the third quarter from a year earlier, according to PitchBook.

“We have a lot less dollars going into the space,” said David Pakman, managing partner at crypto VC firm CoinFund. Tech-focused VCs have moved away from crypto to focus on hot new areas such as artificial intelligence, he said.

The VC firms that backed nearly $2 billion into FTX came under serious fire for failing to spot the fraud. FTX investors even face Sequoia Capital, Thoma Bravo and Paradigm in a class action lawsuit from FTX investors alleging that these VCs were using the legitimacy of the exchange.

As a result, investors are now doing background checks on company founders and asking for hard data on metrics like revenue and customer growth, Pakman said. “They need more than a business plan,” he said.

Startups themselves have also adapted, increasingly choosing to launch their businesses in places like Singapore, the UK and the European Union, which are considered more crypto-friendly than the US, according to Pakman.

Kate Laurence, CEO of Bloccelerate VC, said that the “irrational exuberance” that characterized the crypto bull run made it necessary to vet potential investments, but now is a much different time for VCs.

“Due diligence is not something they can choose to participate in or not,” she said.

Decentralized Finance

According to Paul Veradettakit, managing partner at crypto VC firm Pantera Capital, interest in decentralized finance increased due to the collapse of FTX, a centralized exchange.

“We see a new breed of DeFi companies around derivatives and structured products, companies hoping to provide custody separation and clearing, and companies providing more transparency around credit,” he said.

While the total value of cryptocurrencies locked in DeFi applications is still down from a year ago, it has picked up in recent months.

FTX brought home the risk of holding digital assets on a centralized exchange, Edge & Node’s Kline said. Former FTX users are still trying to recover about $16 billion of crypto that was trapped on the platform when it went down.

For all the soul-searching and change that has gone into FTX, the defunct platform may be about to take on a second act. Three bidders are competing to buy the remains of FTX and restart the exchange in an auction for the assets.

“It’s like, are you kidding me? Did you learn anything?” Kline said.

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Updated: 11 November 2023, 09:12 PM IST