scorecardWhat the collapse of FTX means for the future of crypto
  1. Home
  2. investment
  3. news
  4. What the collapse of FTX means for the future of crypto

What the collapse of FTX means for the future of crypto

Sarah Jackson   

What the collapse of FTX means for the future of crypto
Investment3 min read
  • Sam Bankman-Fried's crypto exchange FTX collapsed in a matter of days and has started Chapter 11 bankruptcy proceedings.
  • The FTX fiasco is the latest in a series of meltdowns to rock the crypto world this year.

The crypto winter is getting worse, and FTX is its latest victim.

Less than a year after it boasted a $32 billion valuation, the crypto exchange, owned by Sam Bankman-Fried, faced a "liquidity crunch" that forced it to try to sell itself to rival Binance. After Binance walked away from the deal, citing issues "beyond our ability or control to help," FTX scrambled to find an infusion of cash elsewhere, but failed.

Consequently, FTX said Friday it had begun Chapter 11 bankruptcy proceedings. Bankman-Fried has also stepped down as CEO.

The fallout is wide-ranging. Contagion fears sprung up last week, fueled by reports of heavy exposure to FTX's native token on the balance sheet for trading firm Alameda Research, also owned by Bankman-Fried. The value of the overall crypto sector dropped 12% over a day to $911 billion, according to CoinMarketCap. JPMorgan strategists say the FTX debacle could transform the industry.

Here's what crypto's latest blowup could mean:

Regulators might crack down, or at least try

Crypto has famously had little oversight, partly by nature.

"The separation of crypto from the regulator was a design choice," said David Yermack, the Albert Fingerhut Professor of Finance and Business Transformation and chair of the finance department at NYU's Stern School of Business. "But that has its costs and benefits. One of the costs is that you're vulnerable to these kinds of events."

There's rampant speculation in the market, but regulators haven't caught up.

"Regulators are still trying to figure out what they're going to do and how they're going to act," said analyst James Royal, who writes about wealth and investing. "It's been a long time coming, and it's a real wild west out there for anybody who is trading crypto."

Regulating crypto may require proactive involvement from exchanges themselves.

"There's no central node and there's no leadership, no board of directors, nobody that the government can reach out to to provide the data and to take orders that might come from a court and actually freeze somebody's accounts or put liens on their assets," Yermack said. "It's something the government may wish to regulate, but it's not going to happen without the cooperation of some of the players in the industry."

Big banks could be less likely to let people trade crypto

Financial institutions like Goldman Sachs, JPMorgan, and Morgan Stanley tried to capitalize on the crypto boom last year with services like trading crypto futures or derivatives.

But the crypto winter may put pressure on banks to reconsider offering these services and try to distance themselves instead, Royal says.

Crypto exchanges should watch for contagion risk

Other exchanges and companies should be on high alert for continued fallout.

"There could very well be a contagion where people start to withdraw assets on other platforms because they saw what happened here and they wonder where else could this occur next," Yermack said. "There may be exchanges that have not done anything to call into question their stability, who are just bystanders, but nevertheless get sucked into it."

Investors should be wary

People already invested should take steps to protect their assets.

"There's a lot of confusion, lack of clarity, lack of transparency in how these exchanges are holding funds," Royal said. "If you're holding [crypto] on an exchange, you need to understand how it's held and what recourse you have if your exchange goes bankrupt."

The firestorm should also be a cautionary tale of the perils of investing in crypto in the first place, he added.

"As an investor, you should be seriously questioning what you're investing in if it can evaporate over a weekend," Royal said. "The prices are entirely based on sentiment and belief in the future of crypto...If that belief goes away, you've got nothing."