The Crypto Industry Is Struggling to Find a Future

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A nine-page document that proposed a new type of financial system that wouldn’t rely on any “trusted third party” surfaced on an obscure mailing list shortly after many Wall Street banks failed in 2008.

The study served as the foundation for the development of the cryptocurrency market. Its supporters rejected the high-risk business methods of a select group of influential financial firms that contributed to the Great Recession, instead promising to conduct business in a transparent and equal manner.

However, a single cryptocurrency company’s $32 billion exchange FTX’s activities last month sent the developing market into its own kind of a financial crisis a la 2008. Once regarded as a secure exchange for trading virtual currencies, FTX declared bankruptcy following the cryptocurrency equivalent of a bank run, leaving business leaders, investors, and enthusiasts to question how a technology designed to address the flaws of conventional finance ended up reproducing them.

Executives who were rejoicing in the crypto market’s seemingly unstoppable expansion a year ago are now frantically trying to demonstrate that they are capable of learning from their mistakes and recapturing the original goals of the sector. The biggest exchange in the world, Binance, declared last month that it will provide more details about its finances and hire independent auditors to examine those disclosures. The largest cryptocurrency exchange in the United States, Coinbase, declared that it was dedicated to a

decentralized system where you don’t have to trust us.

Many cryptocurrency proponents are asking investors to turn to more experimental platforms run entirely by code rather than storing their digital assets with large corporations in order to press for more radical reforms.

FTX’s collapse, however, demonstrates just how far away cryptocurrency is from realizing its potential and achieving mainstream acceptance despite all the promises of change. This year has seen a rise in consumer mistrust brought on by significant financial losses, criminal probes, and a hostile regulatory environment in Washington. Binance CEO Changpeng Zhao stated at a conference last month that the collapse of FTX would cause the sector to lag by years.

The collapse of the exchange accelerated months of losses in the virtual currency market that had been sparked by a severe spring crisis that occurred amid a broader retreat from risky assets. Some well-known crypto companies filed for bankruptcy as a result of the upheaval. The price of Bitcoin, the first and most well-known cryptocurrency, has been less than $17,000, down around 75% from its peak of almost $70,000 almost exactly one year ago.

Former Securities and Exchange Commission official and outspoken critic John Reed Stark said,

You start to go through these difficulties, and they mount up one after the other after the other. More and more individuals are realizing that this is a hoax.

After past crashes, the cryptocurrency market has recovered, drawing well-known investors who have invested even more money into cutting-edge businesses. However, the collapse of FTX has been cited as the worst event in the brief history of the sector.

Bitcoin’s beginnings

The first cryptocurrency was created in 2008 when a cryptic author by the name of Satoshi Nakamoto released a white paper on Bitcoin that provided a thorough explanation of what would later develop into cryptocurrencies. The article described the underlying technology of Bitcoin, which was a blockchain, a publicly available ledger where transactions would be recorded for everyone to see.

Early supporters of Bitcoin believed it might serve as the cornerstone of an open, fair financial system. Libertarians who had grown weary of conventional finance, particularly the concentration of power in the hands of a few large corporations, made up a large portion of the paper’s followers.

Crypto initially had mostly criminal applications. Bitcoin was used by thieves and drug dealers to transfer large sums of money without the need for a bank or other middleman to handle transactions.

But over time, law enforcement improved its ability to detect cryptocurrency crime, while technology advanced to support more complex financial applications like borrowing and lending. People who began their careers on Wall Street, such as Sam Bankman-Fried, the creator of FTX, who worked at the trading firm Jane Street, got involved in the developing sector in an effort to capitalize on the technology.

As the business expanded, it began to take on some of the traits of the Wall Street institutions it was intended to supplant. With most transactions taking place on a small number of major exchanges, including as Binance, FTX, and Coinbase, the world of cryptocurrency trading got more and more centralized. According to an industry data tracker, in the months prior to FTX’s demise, the trading volume of cryptocurrencies on Binance alone exceeded the sums of its seven nearest rivals.

According to Charley Cooper, managing director at the blockchain firm R3, the original goal of cryptocurrencies was

an attempt to rewrite the laws of finance on a worldwide basis.

And here we are once more, in a sector that is even more controlled than banking.

Up to May of last year and into 2022, the value of cryptocurrencies skyrocketed. The popular cryptocurrency Luna crashed at that time, causing the crypto market to collapse. Celsius Network and Voyager Digital, two significant lenders, declared bankruptcy. A “crypto winter” of low pricing and waning interest was bemoaned by enthusiasts.

In the midst of the crisis, FTX was regarded as a somewhat reliable force. The Bahamas-based business provided a market place where users could buy and sell cryptocurrency while also providing popular but high-risk trading choices that are forbidden in the US. The 30-year-old Bankman-Fried, who had turned FTX into a $32 billion business, was known for saving failing businesses and helping out friends in need.

Then, a run on deposits last month revealed a $8 billion gap in FTX’s accounts. Within a week, the business filed for bankruptcy. A joint investigation by the Securities and Exchange Commission and the Justice Department is looking into whether FTX improperly loaned money from its customers to Alameda Research, a cryptocurrency hedge fund that was also formed and owned by Bankman-Fried.

A “Lehman moment” for cryptocurrency has been referred to as the implosion, in allusion to the investment bank whose collapse helped trigger the 2008 financial crisis. Other businesses connected to FTX began to sway. One of the businesses that FTX had bailed out in the spring, the cryptocurrency lender BlockFi, filed for bankruptcy on Monday, citing its ties to Bankman-Fried.

Some well-known cryptocurrency individuals have attempted to portray FTX’s demise as a positive development, claiming that it will focus attention on developing useful applications for the technology.

The CEO of cryptocurrency payment company Circle, Jeremy Allaire, remarked,

For us, this is actually a terrific moment. The guys who were focused on constructing massive speculative trading casinos are dissatisfied because we are providing actual value.

The majority of Binance’s operations are similar to those of FTX, but the company’s CEO, Mr. Zhao, has recently taken pains to set himself apart from Mr. Bankman-Fried by labeling the former rival a liar and denouncing FTX’s riskiest business methods. Binance introduced a new “proof of reserves mechanism” on Nov. 25 in an effort to allay users’ concerns that it would be susceptible to the same kind of run on deposits that destroyed FTX and to provide customers with information about the quantity of bitcoin held in its accounts. (However, Binance’s proposals came under fire for omitting crucial details.)

In a blog post, Coinbase claimed that it always holds the same amount of money that consumers deposited in an effort to allay concerns about a collapse. The post stated that “there cannot be a ‘run on the bank’ at Coinbase.”

However, some industry insiders contend that the very presence of significant businesses like Binance, Coinbase, and FTX is in opposition to the principles of cryptocurrency. Since FTX’s demise, some cryptocurrency aficionados have flocked to smaller companies in the experimental area of decentralized finance, which enables traders to borrow, lend, and conduct transactions devoid of banks or brokers, depending instead on a publicly available system underwritten by code.

However, DeFi has its own issues, such as vulnerability to hackers, who have stolen billions of dollars from the research projects this year.
Hilary Allen, a finance specialist at American University, stated, “They’ve based it on clumsy technology that is incredibly wasteful.” They have highly fragile operations.

In Washington, scrutiny has also increased. SEC Chair Gary Gensler has threatened to investigate cryptocurrency companies for breaking securities laws. On December 13, the House Financial Services Committee is expected to hold a hearing to discuss FTX’s demise.

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