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How did FTX’s risky practices go unchecked for so long? Can trust in the crypto industry be restored after this high-profile failure? Is meaningful regulation coming that could stabilize the volatile crypto market?
The recent conviction of Sam Bankman-Fried, founder of crypto exchange FTX, highlights regulatory gaps that have long enabled risky practices in the crypto industry. Experts say the crypto industry must oust bad actors in the meantime to restore trust.
Continue reading to learn how Sam Bankman-Fried’s guilt might affect the crypto world.
Bankman-Fried and the Crypto Industry
Sam Bankman-Fried, once the wealthiest and most influential figure in crypto, now faces decades in prison after being convicted of massive fraud in the collapse of his FTX exchange. The verdict compounds a catastrophic year for digital assets.
Here’s how Sam Bankman-Fried’s guilt could impact the crypto industry.
Background of FTX
Just over a year ago, Sam Bankman-Fried was a standout figure in the cryptocurrency realm, turning crypto exchange FTX into a $30 billion enterprise and amassing an estimated wealth of $26 billion seemingly overnight.
But Bankman-Fried’s fortunes took a sharp turn last December when federal prosecutors leveled eight charges of fraud and conspiracy against the “king of crypto,” accusing him of misappropriating billions in FTX customer funds. The climax came earlier this month when a jury found Bankman-Fried guilty on seven counts of wire fraud and money laundering.
An Underregulated Industry
Bankman-Fried’s guilty conviction underscores glaring regulatory gaps in the crypto industry. Experts argue that the lack of oversight creates opportunities for companies to exploit the disparity between regulated financial markets and the unregulated crypto space. Consequently, many crypto companies thrive by taking advantage of existing regulatory loopholes and operating in ways not clearly defined by the rules, which has led to numerous instances of fraud and misuse of customer funds.
Bankman-Fried’s downfall resulted from FTX’s risky practices, which deviated from the caution commonly exercised in traditional markets. The company used illiquid assets as security for nearly two-thirds of the money it owed to customers while holding just $4.7 billion in liquid assets. The company then used customers’ funds unlawfully and without their knowledge to make risky investments and political donations and to buy expensive real estate through Bankman-Fried’s hedge fund, Alameda.
To secure customer funds, FTX introduced its own cryptocurrency, FTT, which proved illiquid and challenging to offload. When investors attempted to sell the currency on the exchange, FTX’s insufficient liquid assets contributed to FTT’s value plummeting from over $26 per coin at the start of November 2022 to under $2 by mid-month. At that point, FTX couldn’t cover its debts or repay customers.
The Impact of FTX’s Collapse
Bankman-Fried’s actions have immediate financial consequences for crypto users and investors, including:
- Financial peril for thousands of individual customers.
- Negative perceptions and association of the crypto industry with scams.
- The tarnishing of major investors’ credibility.
These consequences have broader implications for the crypto industry, leading to:
Experts contend that FTX’s collapse, while not conclusively signaling the demise of the crypto sector, contributes to its ongoing downsizing. Though key currencies like Bitcoin and Ether appear poised to endure, many tokens, exchanges, and crypto lenders also won’t survive as users move their assets into digital wallets to safeguard them.
Congress’s momentum in advancing crypto sector regulations has slowed, partly due to Bankman-Fried’s arrest and lawmakers’ attention shifting to other priorities like the conflicts in Ukraine and Israel and rapid developments in AI. In addition, there are partisan differences on how stringently to regulate crypto companies.
If you’re interested in learning about Sam Bankman-Fried’s story, you can read Shortform’s guide to Going Infinite here.
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