On March 29, Sam Bankman-Fried, co-founder of the bankrupt crypto exchange FTX, was sentenced to 25 years in prison for defrauding investors of his company and ordered to forfeit $11bn to compensate victims. Compared to the 100 years he was initially sentenced based on official government regulations, his relatively shorter punishment has re-sparked conversations regarding the seriousness of Bankman-Fried’s crimes and their implications with the future of the crypto-industry. Although many have seen this ruling as a reasonable signal to the industry that it needs to elevate the quality of its services, the FTX Fraud rather marked the downfall of the cryptocurrency industry and has underscored the pressing need for stricter government regulation.
Since the official bankruptcy of FTX Trading LTD., a Bahamas-based cryptocurrency exchange company linked to the cryptocurrency trading firm Alameda Research, on Nov. 11, 2022, the future of cryptocurrencies is looking dismal. When FTX filed for bankruptcy, it shook the already volatile crypto market.
Before bankruptcy, FTX Trading LTD, or FTX for short, was the world’s third largest exchange, with its own currency of FTTs. Not only was it large, but FTX was also able to garner widespread attention and expand its popularity when its founder, Sam Bankman-Fried, promised his investors of high returns on their investments. Thus, FTX and its owner were considered as crypto’s “golden boys,” attracting high profile investors. However, unlike the traditional bank structure of “ring-fencing,” which involves the segregation of a portion of an individual’s or company’s assets from the rest, FTX did not have this virtual barrier, which allowed FTX to use money from customer deposits when the investments of Alameda Research began to fail.
The problematic financial situation of FTX was unveiled when Binance, an online cryptocurrency exchange company, publicly announced its disposal of its FTT tokens, on November 6, 2022. Following the release of a large supply of FTT tokens by Binance, the price of many currencies plummeted exponentially, scaring many of the traders and forcing hundreds to start pulling out of FTX. However, since FTX did not have enough assets in reserve—with the company having been lent to Alameda Research—it could not match the huge demand of the investors and outright discontinued any withdrawals.
Although Binance planned to alleviate the situation by buying the whole of FTX, the rescue plan failed. FTX soon filed for bankruptcy, and multiple large sized scandals were revealed — the biggest being the revelation that Bankman-Fried had been siphoning billions of dollars from the company to purchase luxury real estates and fund political parties. Accordingly, many consider the FTX as the biggest financial scam in U.S. history, and its collapse has led to debates about what would happen to the future of cryptocurrencies.
Due to the scale of the FTX scandal, it is almost guaranteed that strict regulations would be imposed in the crypto-industry by the US government. To prevent any sort of future corruption, certain paperworks to prove accountability and transparency would be required to be maintained by companies, along with strict implementations of ringfencing. For example, the U.S., U.K., and the European Union are all taking steps to create protection policies for the crypto-industry. If these types of regulations are introduced, cryptocurrency would lose many of its unique benefits relating to anonymity and decentralization, which may threaten the entire industry.
However, when considering the scale of the FTX scandal, there is still a fair chance that the US will see a push for a complete prohibition on cryptocurrencies. Oppositions to cryptocurrencies have long argued that the digitized currency has been a risky investment.
On the other hand, many speculate that cryptocurrency will eventually die out and is already a lost cause as many investors have lost their faith and trust in cryptocurrency as a whole. In the wake of FTX’s collapse, investor sentiment is currently very fearful and cautious about cryptocurrency, which means that even if the currencies were to be continued, they would only exist at a minimal scale, and would be unable to attract major investors. This scenario would be quite feasible unless crypto-confidence, or investor confidence, miraculously returns. If not, new alternatives to cryptocurrencies would rise, much like how cryptocurrencies were once considered the new currency.
The recent scandals surrounding FTX and Bankman-Fried have stunted the popularity and growth of the cryptocurrency industry. The once bright future of cryptocurrency remains unclear. However, the most practical outcome of this issue would be to assume that necessary regulations would be introduced to protect the assets of investors.
