Sam Bankman-Fried’s crypto exchange FTX crashed within days and began Chapter 11 bankruptcy proceedings. The FTX debacle is the latest in a series of crashes that have rocked the crypto world this year. According to experts, it is possible that the vortex may spur efforts for regulation, which is sorely lacking. Thus, it will at least serve as a warning to investors.
The crypto winter is getting worse and FTX is its latest victim
The cryptocurrency exchange owned by Sam Bankman-Fried boasted a $32 billion valuation. However, cryptocoin.com In less than a year, it faced a ‘liquidity crunch’ that had to try to sell itself to competitor Binance. Binance backed out of the deal, saying it was “beyond our ability or control to assist.” Later, FTX tried to find a cash infusion elsewhere, but was unsuccessful. As a result, FTX said on Friday it has begun Chapter 11 bankruptcy proceedings. Bankman-Fried also stepped down as CEO.
The collapse is wide-ranging. Contagion fears fueled by the high concentration of FTX’s native token on the balance sheet of Alameda Research, a trading firm also owned by Bankman-Fried, surfaced last week. According to CoinMarketCap, the value of the overall crypto industry fell 12% in one day to $911 billion. JPMorgan strategists say the FTX debacle will likely transform the industry. In this context, they explain the implications of crypto’s latest boom.
Will the editing work accelerate?
Crypto, partly due to its nature, has had little oversight. Regulating crypto requires the proactive participation of the exchanges themselves. David Yermack, Albert Fingerhut Professor of Finance and Business Transformation and head of finance at NYU Stern School of Business, said:
Separating crypto from the regulator was a design choice. But it has costs and benefits. One of the costs is that it is vulnerable to such events. There is no central node, no leadership, no board of directors, no one the government can reach to provide data and take orders from the court and actually freeze someone’s accounts or place a lien on their assets. Something the government might want to regulate. But it won’t happen without the cooperation of some players in the industry.
There is widespread speculation in the market, but regulators have not caught up. Bankrate analyst James Royal, who writes about wealth and investment, explains:
Regulators are still trying to figure out what to do and how to act. It’s been a long time and there is a real wild west for anyone who trades crypto.
Big banks may be less likely to let people trade crypto Financial institutions like Goldman Sachs, JPMorgan, and Morgan Stanley have tried to capitalize on the crypto boom last year with services like crypto futures or derivatives trading. But James Royal says that the crypto winter will likely put pressure on banks to reconsider offering these services and try to distance themselves instead.
Crypto exchanges need to monitor FTX contamination risk
Other exchanges and companies need to be on high alert for the ongoing contagion. David Yermack comments:
A contagion is possible where people are starting to withdraw their presence on other platforms just because they see what’s going on here and wonder where else it could be. There may be exchanges that have done nothing to question their stability, just bystanders, but still drawn into it.
A cautionary tale about the dangers of investing in crypto!
Therefore, investors need to be careful. People who have already invested should take steps to protect their assets. James Royal points out the following:
There is a lot of confusion, uncertainty and lack of transparency about how these exchanges hold funds. If you hold crypto on an exchange, you need to understand how it is held and what recourse you have if your exchange goes bankrupt. The firestorm should be a cautionary tale about the dangers of investing in crypto in the first place. As an investor, you need to seriously question what you’re investing in if it can evaporate over the weekend. Prices are entirely based on feeling and belief about the future of crypto… If that belief disappears, you’re left with nothing.
