Crypto: What Next?

The crash of FTX has revealed those willing to take accountability in the cryptocurrency industry, but stability will never be reached until every platform steps up.

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Prices plummeted. Investors frantically scrambled to recover their funds. Two months ago, Futures Exchange (FTX) crashed. As a cryptocurrency exchange platform based in the Bahamas, it allowed users to connect their wallets and trade digital currencies that were not available on American platforms. At its peak in 2021, FTX was the third-largest cryptocurrency exchange and hosted over one million users.

However, it was soon revealed that the company had a long history of defrauding investors, resulting in a hole of $8 billion in the company’s finances. FTX filed for bankruptcy almost immediately after this discovery was made public. Amid the chaos, it was also revealed that FTX had been hacked by its management to collect consumer assets. Essentially, the company had stolen from its own customers. Eight lawsuits have been filed against FTX since its bankruptcy.

Consequently, a wave of customers went to withdraw their digital assets, totaling billions of dollars. FTX, bankrupt and having stolen all of its own money, could not support these withdrawals. A halt on withdrawals was enacted; the deposits of many customers are currently unretrievable. Some who transferred large amounts of money into their FTX wallets fear their life savings are lost forever.

Crypto platforms have crashed in the past. It’s inevitable, given the volatile nature of the currencies. Vauld, for example, hit financial hardships earlier in 2022. Tokens such as Bitcoin have also had a tumultuous history: in June of 2011, Bitcoin lost 99 percent of its value in a few nerve-wracking days.

However, popular cryptocurrencies have undeniably taken an unprecedented hit following the collapse of FTX. Ethereum and Bitcoin, two of the most popular coins, reached a two-year low as of November. Even more concerning for investors is Congress potentially re-evaluating the role of volatile cryptocurrency exchanges in the American economy. In fact, the negative attention the industry has been receiving in the past few months has led The New York Times to describe it as “the worst moment in the industry’s short history.” With so much attention from the media and government, this may very well be true. This suggests that there may be more government regulation in the future, and with many investors being attracted to cryptocurrency due to its lack of governmental involvement, many may pull out.

FTX’s sudden and shameful demise has many platforms scrambling to prove their reliability. Binance, the world’s largest exchange, announced that it would make efforts to be more transparent about its finances and recruit independent auditors to review them. Subsequently, reports have indicated that while Binance’s funds are not empty like FTX, Binance failed to meet its 1:1 ratio of reserves to customer assets. Thus, in the event of a collapse or a run, some customers will be unable to withdraw their funds (similar to the aftermath of the FTX collapse). Unlike banks, cryptocurrency investments are not FDIC-insured, meaning that investors cannot recover their money from the government in the event of a run. Readers of Binance’s reports have also been left deeply unsatisfied by the lackluster details. Whether this will change as Binance continues to publish reports is yet to be determined. Moreover, Coinbase, the biggest exchange in America, also announced that it was decentralizing in order to establish more customer control and accountability. With corrupt CEOs such as FTX’s Sam Bankman-Fried—or, as the media has branded him, SBF—this may be a good investment. Whether the effects will materialize or not is yet to be determined.

In the months following, other platforms have been taking more accountability, but the former CEO of FTX himself has been notably imprudent. SBF recently pleaded “not guilty” to fraud and other charges. He was consequently released on a $250 million bond to his parents’ multi-million dollar home in Palo Alto, where he was allowed contact with outsiders and access to social media services such as Twitter. He played video games while conducting media interviews.

SBF needs to be held accountable to set an example for other cryptocurrency platforms in increasing company transparency. Government regulation will likely increase due to intense scrutiny, but change must also come from within cryptocurrency companies in order to impose long-lasting stability. Only then will cryptocurrency recover.