As 2022 wrapped up, people felt the coldest wave of “crypto winter,” sending chills down their spine. With what James Bromley, an attorney involved in the FTX bankruptcy proceedings, described as
Sam Bankman Fried’s cryptocurrency empire, FTX, collapsed in a lightning-fast series of events. Followed by
Though the collapse has brought up so many questions, the developments in the case leave two major ones looming: How far will the damage spread? And Is there a way to save cryptocurrency?
“The recent collapse of FTX is a loud warning bell that cryptocurrencies can fail, and just like we saw with over-the-counter derivatives that led to a financial crisis, these failures can have a ripple effect on consumers and other parts of our financial system. The cryptocurrency market’s continued turmoil is why we must think carefully about how to regulate cryptocurrencies and their role in our economy,”
said Sen. Sherrod Brown (D-Ohio), the Chair of the Senate Banking, Housing, and Urban Affairs Committee.
Assessing the Damage
The immediate aftermath of the crash saw the value of many cryptocurrencies drops sharply. Bitcoin, the world’s largest cryptocurrency by market capitalization, saw its value
The collapse also caused a domino effect, with many investors liquidating their assets and several crypto exchanges filing for bankruptcy. The companies, due to “significant exposure” to FTX, took a page from their “biggest creditor’s” handbook and filed for Chapter 11. The latest one to join the list is
In addition to the direct financial losses suffered by the investors, the fall led to a negative impact on the overall perception of cryptocurrency. The traditional financial institutions and mainstream investors saw the collapse as a failure of security and stability in holding digital assets.
In a
The skepticism is not baseless; this cryptic world operates in a peer-to-peer network of blockchain, where the transactions are just a click away. Many mainstream economists like Christine Lagarde, Paul Krugman, Nouriel Roubini, and Kenneth Rogoff have come out
European Central Bank President Christine Lagarde said she is concerned about people “who have no understanding of the risks, who will lose it all and who will be terribly disappointed, which is why I believe that that should be regulated.”
A
With the traditional finance system, even if the people do not fully understand the system, stringent laws and regulations back it up, protecting customers’ interests. In the case of DeFi, the regulations are there, but the exercising authority and the political lines blur around the edges.
In a
speech back in Aug 2021, the SEC chair Gary Gensler said, “There are some gaps in this(crypto) space, though: We need additional Congressional authorities to prevent transactions, products, and platforms from falling between regulatory cracks. We also need more resources to protect investors in this growing and volatile sector.”
More than 13 years since the release of Bitcoin and more than a year since this speech, there are still no centralized regulations backing the space up. The crypto industry has been in a cold war with regulators for quite some years now. The drill doesn’t amount to anything but reviewing potential bills to pass aimed at revolutionizing this uncertain digital market.
“ If you wanted to build a new system for trading crypto, you could kind of just code it up and see what happened. Then you could go to the regulators and say, “Here’s how the rules for crypto should work,” and they might listen to you. (Or they might not. They might argue, as many regulators did, that crypto is largely covered by existing rules and that you were breaking them. But you might go ahead anyway or move to a different country with friendlier regulators.).” Matt Levine wrote in an article titled “
End number of new digital currencies and companies have been launched, and the policing authorities have struggled to keep up. There are
In the months following the crash, a majority of these exchanges have been
Regulation and Decentralization’s Impact on the Future of Cryptocurrency
“2023 for us could be a real inflection point in policy, and a regulatory framework could be one of those things that help to accelerate the accelerator side of the crypto downturn,”
said Tom Duff Gordon , VP of international policy at Coinbase.
The FTX breach had a detrimental effect, yet despite this, the cryptocurrency industry has proven to be quite resilient.
“It’s frustrating to see what a lot of people in crypto see as a built-in bias against the industry, which many of us understand because this space does have a side to it that deserves and requires scrutiny,” says
Cryptocurrency exchanges are constantly evolving, and a lack of regulations in this volatile space makes it easier for these institutions to engage in fraudulent and illegal activities. The lawmakers now have an impetus to get the proposed legislative laws finalized and set up a widespread regulatory framework.
The demise of this crypto giant did not help those who were building their trust in cryptocurrencies. However, they are missing the argument that FTX was not “Crypto” itself; it was a centralized medium that let you borrow, buy, and sell crypto. The convolutional framework of “real” cryptocurrencies is based upon a decentralized financial system(DeFi).
“The major benefits (of DeFi) are we're looking at transparency. We're looking at the automation of risk management. We're looking at trustless reporting. You don't need to trust a third party, person, auditor, SBF, or anybody to understand the NAV and the valuation of a certain protocol. You can use things like subgraph technology. You can use things like Chainlink Oracle, and you don't have to trust a human being. You have to trust decentralized code, which is much easier to buy into.” Mona El Isa, the CEO and founder of Avantgarde Finance and founder of Enzyme, said
in an interview while talking about how DeFi can save cryptocurrency.
In their
However, they also pointed out how we still have a long way to go since “the new financial architecture proposed by cryptocurrencies and decentralized finance presents formidable challenges for regulators.”
The biggest challenge in regulating the crypto architecture comes from the jurisdiction-free nature of the currency originating from the use of permissionless blockchain protocols and smart contracts. A common framework of regulations is needed to protect the interests of global investors and to ensure that exchanges do not exercise free will when it comes to operating across different countries.
“There also really needs to be coordination on enforcement to ensure that countries are not a safe haven and that there’s that level of global cooperation,”
said Wharton’s Kevin Werbach , a longtime advocate of stronger oversight.