What’s in store for crypto’s future after the FTX debacle
Asian Banking & Finance spoke with industry experts and crypto leaders to learn how the exchange's bankruptcy affected the industry.
In November 2022, cryptocurrency exchange platform FTX filed for bankruptcy. Revelations even before and after its collapse–an alleged lack of reliable financial statements and cash control processes, as well as alleged misuse of funds– severely damaged not just FTX’s chances for a possible return down the line, but the crypto industry’s overall reputation.
“FTX’s demise and unknown repercussions have severely shaken investors’ confidence in crypto assets, which numerous scandals had already weakened,” Moody’s Investors Service warned in its report on the FTX collapse.
The ratings agency noted that the total value of all cryptocurrencies fell by 18% in November 2022 and is down by 62% year-to-date as of December 2022.
But one organisation’s failures should not equate to wider distrust in the crypto industry, according to Joshua Foo, Regional Director, ASEAN and Central Asia, Chainalysis
“The cryptocurrency industry has an opportunity and responsibility to take stock of its values and advocate for a better, safer ecosystem that paves the way to new models of ownership in the economy. Together with regulators, we can capitalise on blockchain’s inherent transparency and help address issues that the traditional financial system cannot solve,” Foo told Asian Banking & Finance in an exclusive correspondence.
Asian Banking & Finance spoke with industry experts to learn their thoughts on how the collapse of FTX–and greater scrutiny on crypto following the debacle–may affect the industry as a whole.
Adrian Przelozny, CEO and co-founder of Independent Reserve:
History is cyclical and has shown its tendency to repeat itself. Like the traditional banking industry, the cryptocurrency and blockchain industry is going through its rite of passage, with some inroads to make before it reaches the trust levels of banking.
Here at Independent Reserve, we believe that the recent setbacks, FTX’s insolvency, and the Terra Luna collapse are watershed moments that can positively shape the industry's future. Events such as these, albeit painful, would mean that the market will eventually converge and consolidate in the longer run, weeding out the bad players as institutions and retail customers demand stronger regulatory oversight and for exchanges to be more professional in their business conduct.
To safeguard consumer interest, regulators need to steer exchanges to exercise greater agency over their operations and risk controls to ensure that the right level of risk and technology management are in place, exchanges are appropriately holding their customers’ assets, and that people operating the exchanges have the required skills.
Given that interest in cryptocurrency remains robust and is set to remain a rising popular asset class despite recent headwinds, we firmly believe the way to protect investors would be to equip them with the knowledge to make informed investment decisions. Allowing licensed exchanges like Independent Reserve to advertise prevents consumers from seeking information from dubious sources or unregulated offshore exchanges that expose them to greater risks and scams.
Singapore is leading the charge in recognising the benefits of having a safer and well-regulated crypto industry. To transform the crypto industry into a secure, robust, and regulated financial service in Singapore and the region, regulators, industry players, and investors need to collectively work together to tailor and define the rules of engagement to build a safer ecosystem.
Says Moody’s Investors Service:
This crisis will have long-lasting effects on the crypto industry. Falling crypto asset prices will restrict businesses’ ability to raise funds and depress customer demand. Lower crypto asset valuations will restrict businesses’ ability to issue tokens to finance their expansion, constraining the industry’s future earnings. Falling asset prices will also depress demand for crypto services. The Bank of International Settlements estimates that 73%-81% of crypto investors have likely lost money on their investment as of November 2022.
These factors will deteriorate the credit quality of centralised finance (CeFi) companies and intermediaries managing their customers’ crypto transactions. Decentralised finance
(DeFi) applications, financial platforms allowing participants to interact without intermediaries will also feel the effects of FTX’s demise despite being more transparent. Global funding for blockchain and cryptocurrency startups decreased by 35% quarter-over-quarter in Q3 2022, as venture capital investors remained cautious in the face of the ongoing crypto winter, high inflation and the Federal Reserve’s interest rate hikes. We anticipate that financing will continue to decline in the upcoming quarters due to investor apprehension caused by FTX’s demise.
Says Joshua Foo, regional director, ASEAN and Central Asia, Chainalysis:
The impact of FTX’s collapse is significant, and many people will be directly and indirectly affected by these failures, the full details of which will only be fully known in the weeks and months to come. Our sympathies lie with them.
I want to highlight that what happened at FTX was not a failure of the cryptocurrency or blockchain ecosystem. It was the failure of a single organisation that acted irresponsibly and lacked transparency in its actions. Similar scenarios have happened across various industries - including in technology and financial services - and will likely happen again.
The cryptocurrency industry has an opportunity and responsibility to take stock of its values and advocate for a better, safer ecosystem that paves the way to new models of ownership in the economy. Together with regulators, we can capitalise on blockchain’s inherent transparency and help address issues that the traditional financial system cannot solve.
Through our research, we have been looking at how businesses and individuals utilised cryptocurrencies in their daily lives and discovered a variety of use cases. Ranging from gaming to art, to music, to raising money for the Ukrainian war efforts, we found that there is an ongoing value that the cryptocurrency industry can provide. Crypto is a cross-border, instantaneous, and cheap way to exchange value, and I believe the demand for the solutions it can offer will only continue to grow.