Crypto Revolution: A Look at How Crypto is Transforming One Year After FTX Implosion
The events of a year ago are permanently ingrained in the minds of those who make a living trading cryptocurrencies. Travis Kling, the head of Ikigai Asset Management, described the day FTX halted withdrawals as the most dreadful day of his career and one of the worst days of his life in a series of tweets on November 7. Just four days later, Sam Bankman-Fried’s exchange declared bankruptcy, marking what could be considered the bleakest period in the history of cryptocurrency.
“The first few weeks were incredibly brutal. I didn’t sleep much. Feelings of fear, guilt and shame. We fired most of the team,” Kling wrote.
After a year, the industry has changed irrevocably – although at the same time it is remarkably familiar in many ways.
Mostly gone are the giddy day traders and abundant leverage that drove Bitcoin to its November 2021 peak of nearly $69,000. The same goes for celebrities and social media influencers who trade non-repairable tokens and meme machines. Regulators, determined not to get caught again, are tightening their grip. And major financial firms such as BlackRock Inc. are moving in as the U.S. Securities and Exchange Commission sees it give its first blessing to an ETF that invests directly in Bitcoin.
Perhaps the most tangible indicator of crypto’s progress: Bitcoin has recouped all of its losses since the May 2022 crash of stablecoin TerraUSD, which set off a wave of failures that eventually helped bring down FTX.
“People have short memories,” said Jeff Dorman, chief investment officer at asset manager Arca.
Some observers see an industry still plagued by rampant speculation and inadequate safeguards. Tether stablecoin, a pillar of the industry long shunned by speculation about the quality of its underlying assets and allegations that it is being used by criminals, has become more dominant in recent months. Binance, the largest exchange, still operates without an official headquarters.
“The industry still primarily offers assets that can be created out of thin air and values that are extremely manipulable,” said Hilary Allen, a law professor at American University Washington College of Law who has written about crypto’s impact on financial stability. “We still see crypto exchanges doing brokerage — with all the attendant conflicts of interest — and there are still allegations of exchanges commingling with clients’ assets.”
Here are some of the ways crypto has changed since the FTX crash.
Supermarket
When FTX went down, the crypto market had already been in a turmoil for months that claimed TerraUSD, hedge fund Three Arrows Capital and lender Celsius Network. But for FTX, once one of the largest crypto exchanges by trading volume, the fall was even more damaging, according to Aaron Brown, a crypto investor writing for Bloomberg Opinion.
“FTX was just the culmination of a year of crypto credit collapse,” he said. “It sharply reduced retail traders’ easy trading profits and exchange fees, and also hampered staking, NFTs and other bubble scum.”
According to Tegan Kline, founder of Edge & Node, which developed a crypto project called The Graph, the number of over-the-counter tables has decreased, and mainly the more conservative ones remain. This, combined with the reduction in leverage, has weakened liquidity.
“The leverage is gone,” Kline said. “A lot of people have pulled money out of the system or have money stuck in FTX.”
Several crypto exchanges have launched new lending programs in recent months, and several more lending projects are expected to debut soon, hoping to fill the gap. Accepting a Bitcoin ETF could also help increase liquidity.
One of the hardest-hit corners of crypto is NFTs, made famous by collections like the cartoon primates of Bored Ape Yacht Club and the pixelated characters of CryptoPunks. Weekly NFT trading has dropped to half of what it was when FTX went bankrupt.
Regulatory authorities
Like nothing before it, the FTX crash awakened governments around the world to the need for tighter guardrails around crypto. In short, the SEC and Commodity Futures Trading Commission went after top exchanges like Binance (along with CEO Changpeng “CZ” Zhao), Coinbase Global Inc. and Kraken.
“Regulators have stepped up their oversight of centralized exchanges since the collapse of FTX,” said Jacob Joseph, research analyst at crypto analytics firm CCData.
The European Union approved a regulation on cryptoasset markets in May, providing a new legal framework for the industry. Hong Kong and Dubai both rolled out new crypto surveillance systems over the summer, pledging to crack down on bad behavior while establishing themselves as the industry’s new hubs. At the same time, regulators around the world clamped down on Binance, which exited countries like Canada and the Netherlands under pressure.
Zhao is not the only crypto leader to have been caught in the crosshairs. In July, a year after Celsius filed for bankruptcy, former CEO Alex Mashinsky was arrested and charged with fraud (he has pleaded guilty). A week ago, Bankman-Fried was convicted of 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 Bitcoin financial services firm Swan.
Risk capital
In the heady days of 2021 and early 2022, venture capitalists were the industry’s biggest cheerleaders, pouring billions of dollars into budding startups. But FTX’s collapse prompted a quick retreat, with crypto investment funding falling 63% to $2 billion in the third quarter from a year ago, according to PitchBook.
“We have a lot less dollars going into space,” said David Pakman, CEO of crypto VC firm CoinFund. He added that tech-focused venture capital firms have moved away from crypto to focus on new hot areas such as artificial intelligence.
The VCs that pumped nearly $2 billion into FTX came under heavy fire for failing to spot the fraud. Sequoia Capital, Thoma Bravo and Paradigm are even facing a class action lawsuit from FTX investors who claimed that these VCs jumped on the legitimacy of the exchange.
As a result, investors are now doing background checks on company founders and asking for hard data on revenue and customer growth, Pakman said. “They need more than a business plan,” he said.
The startups themselves have also adapted and are increasingly choosing to launch their businesses in places like Singapore, Great Britain and the European Union, which are considered more crypto-friendly than the United States, according to Pakman.
Bloccelerate VC CEO Kate Laurence said the “irrational exuberance” that characterized the crypto bull run overshadowed the need to review potential investments, but now is a much different time for risk managers.
Due diligence “is no longer something they can choose to participate in or not participate in,” he said.
Decentralized financing
The collapse of centralized exchange FTX has rekindled interest in decentralized finance, says Paul Veradittakit, managing director of crypto-capital firm Pantera Capital.
“We’re seeing a new wave of DeFi companies around derivatives and structured products, companies looking to separate custody and settlement, and companies offering more transparency around credit,” he said.
While the total value of cryptocurrencies locked into DeFi applications is still lower than a year ago, it has rebounded in recent months.
FTX drove home the danger of keeping your digital assets on a centralized exchange, said Edge & Node’s Kline. Former FTX users are still trying to recover about $16 billion in crypto that was trapped on the platform when it collapsed.
Despite all the soul-searching and changes FTX’s messy demise has caused, the defunct platform may be about to embark on a second act. Three bidders are competing to buy the remains of FTX and restart the exchange in an asset auction.
“It’s like, Are you kidding me? Haven’t you learned anything?” Kline said.
