The bankruptcy of FTX does not only cause the price of cryptocurrencies to fall. Major players are vacillating, mistrust is rife, and the influx of regulations to come could hurt innovation.
Friday, November 11, 2022, the news broke. The Sam Bankman-Fried (SBF) empire no longer exists as such. The FTX exchange platform, its equivalent intended for the United States market (FTX.US) and Investment Funds crypto Alameda Research, were placed under bankruptcy regime across the Atlantic.
The epilogue of a very difficult week for the Web3 ecosystem? Sadly, the next day news of a hack of the FTX platforms spreads. Originally, we were talking about one Hack of 370 million dollars. Eventually, it can be counted in the billions. Some suspect that SBF is behind the theft of its clients’ funds, which remains to be proven. What is almost certain is that FTX users never have to see their money again.
The earthquake caused by the fall of FTX is unprecedented in crypto and possibly the worst since the fall of the platform Mt. Gox in 2014. It has both consequences within the ecosystem itself, but also for people outside.
Internal crisis: cryptocurrencies and affected actors
A significant but restrained decline in the cryptocurrency market
With any bad news, the most common and expected damage is of course falling markets. And the FTX case was no exception to the rule. of Bitcoin (BTC) lost almost 20% and most other cryptocurrencies saw an even bigger drop.
However, while many observers expected a cataclysm, a 20% drop on such a serious issue seems restrained. Indeed, BTC resisted and remained above the $16,000 threshold. Likewise, Ethereum stayed well away from the $1,000 threshold.
However, the decline was much worse for some arguments. We are thinking in particular about FTX Token (FTT) and Solana (FLOOR). The drop of around 90% makes sense for the former, as it is simply the hallmark of the FTX ecosystem. However, if FTX no longer exists, what will become of FTT? For Solana, this is another topic and the future of the project is at stake.
BlockFi, Solana, Crypto.com: the big ones can fall
The SBF empire had invested in many Web3 projects and protocols (with a portion of its customers’ money, as we know it today). Therefore, some of them were very dependent on FTX and Alameda Research.
First of all, we think of Solana. Indeed, Alameda held over $800 million in SOL. So once the bankruptcy rumors started to spread, SOL fell much more than the others. In the end, it lost almost 60% of its value and billions left. The project’s development teams seem lost, and without a quick fix, Solana’s future is bleak.
Then the BlockFi platform is at risk. Celsius’ former competitor, which went bankrupt last summer, in crypto-secured loans, BlockFi blocked user withdrawals. Reason ? Over $400 million in exposure to FTX. Again, without a savior of last resort, it’s hard to see how the US platform will survive the FTX earthquake.
Finally, many trading platforms have faltered. We especially think of Crypto.com. The latter really has similarities to FTX, especially in aggressive marketing. Also, his proof of bookings showed that they were made up of 25% Shiba Inu (SHIB), a crypto that is just a joke. As a result, users left the Singapore platform in vain, which did everything to calm down.
External crisis: investors and regulators lose confidence
2022: the annus horribilis of crypto investors
The fall of FTX is hopefully the culmination of a particularly difficult year for the crypto ecosystem and its users. Indeed, in the current six-month span, Web3 suffered three major declines.
The first downfall is that of the Terra protocol (LUNA) following the loss of parity of its stable currency, the UST, with the dollar. Then in vogue and the second decentralized finance (DeFi) protocol, Terra disappeared overnight, seeing billions fly away for investors who lost everything.
The second drop is a direct consequence of that of the Terra Network: Celsius. The platform, which offers cryptocurrency-secured loans and attractive returns to lenders, blocked withdrawals days after Terra crashed. Celsius eventually filed for bankruptcy over the summer. Again, that’s billions lost for investors.
Terra also led to the demise of lesser-known funds such as Voyageur Digital and Three Arrows Capital. The latter was an investment fund in Singapore that had invested money everywhere, especially in… Terra.
Therefore, the FTX earthquake is the final blow for many crypto investors. While the Web3 ecosystem needs them to attract new users, trust in centralized exchange platforms appears to have been damaged. It will take many months to get it back, which will probably go through much tougher rules.
A drastic adjustment is coming?
Contrary to popular belief, Web3 is neither a Wild West nor a lawless ecosystem. Many European countries have their own regulations, including France. The United States applies several financial provisions which require trading platforms to establish an entity specifically dedicated to the US market. Finally, MiCA regulation arrives in Europe and will probably enter into force in 2024.
However, it is now recognized that this regulation is only the beginning of a process of increased regulation. The FTX issue is truly a godsend for regulators around the world and all the people who repeat all day long that the cryptocurrency market needs to be better regulated.
While the MiCA hasn’t even been published in the Official Journal of the European Union, some are already talking about a MiCA 2. On the other side of the Atlantic, regulations will tighten, and it’s a safe bet it will be the same in Asia. .
Therefore, 2023 should be the year of global regulation of the sector. For better (transparency of trading platforms) and for worse (inhibition of innovation).