After a series of quick and unforeseen developments, FTX and its US branch filed for Chapter 11 bankruptcy on November 11, 2022. The company’s former CEO, Sam Bankman-Fried, was arrested in the Bahamas on December 12 and later remanded to the US. There he has pleaded not guilty to eight charges, including conspiracy to defraud investors and wire fraud.
The collapse of FTX, which was once a leading crypto exchange with over $32 billion in valuation, has shaken the whole crypto industry. Its repercussions have been felt across various other exchanges and cryptocurrencies as investors’ confidence shattered.
What went wrong with FTX?
Sheer mismanagement and misuse of funds by FTX created an $8 billion hole, which led to the company’s downfall.
The trouble started when deficiencies in FTX’s operational model were made public by CoinDesk on November 2. The crypto news site leaked a document that suggested Alameda, a hedge fund run by Bankman-Fried, actually owned the major chunk of FTT tokens (FTX native tokens). The balance sheet suggested that problems at one company would inevitably have negative consequences for the other.
In the aftermath, the CEO of Binance Changpeng Zhao announced that his company would be selling all of its FTT holdings, which caused the token’s price to drop sharply. What followed was a surge in withdrawals initiated by panicked investors. Due to its inability to arrange such a large sum of funds, FTX stopped allowing customers to withdraw money from the platform on November 8.
However, the last nail in the coffin came when Zhao retracted from his deal of bailing out the struggling FTX just one day after announcing it. He cited mismanagement of user funds and alleged US agency investigations as the basis for backing out.
Considering this FTX fiasco, it is worth mentioning here that crypto CFD trading, although it has its own risks, allows traders to engage with the market without physically owning the assets. As a result, by becoming a part of CFD brokerage platforms, like easyMarkets, traders may evade the standard risks of the cryptocurrency market.
The collapse can spur regulators into action
The crash of FTX within a few days, which was one of the top crypto exchanges, signifies the importance of appropriate regulatory protection in the cryptocurrency industry.
Currently, this sector is largely unregulated, leaving investors without the same level of protection as they would have with traditional asset brokers. However, this recent chaos has built pressure on authorities to reign in this unregulated space before experiencing the next consequential crisis. Reports indicate that more than $1.7 billion in investor funds have been lost from this horrific collapse, leaving around one million people affected.
That said, the governments in the US, Europe, the UK, and various other regions have become active to regulate the crypto market and reduce risks for investors. As of now, Europe’s Markets in Crypto-Assets (MICA) framework is the most comprehensive crypto regulatory model to date, though it will not become active at least until 2024. On the other hand, the United States has yet to establish an all-inclusive set of rules to secure and regulate the cryptocurrency industry.
Cryptocurrency regulation can ensure the industry’s longevity
Last year, multiple platforms, including Celsius, Three Arrows, and FTX, met their demise as they were neither fully decentralized nor properly centralized. These failures reinforce the need for regulators to act quickly, in order to provide necessary protections to investors and build broader confidence in the market.
Regulating cryptocurrencies would be a healthy development for the industry in the long term perspective, as it would grant more stability to the market. Additionally, the implementation of necessary laws can help reduce the frequency of fraud, scams, and market manipulation incidents, which currently plague this growing industry.
Regulators’ reluctance to establish rules for cryptocurrencies has slowed the growth of the digital asset market till now. New legislation could not only safeguard consumers but also boost the mainstream adoption of cryptocurrencies and prevent future market crises.