Cryptocurrency Regulation Update: What's the Impact of the FTX Crash?

How will the FTX crash affect crypto regulations?

The cryptocurrency asset class is tied to hopes of a revamped financial system with fewer centralized players. Enthusiasts have bought into a future in which a decentralized financial system is the dominant way of doing business.

Speculation about this future has helped increase the visibility of alternative technologies such as the blockchain, and now even the metaverse. It's also pushed corporations to provide easy ways to access cryptocurrencies.

This is a change from when cryptocurrencies first hit the market — in the past, digital coins like Bitcoin and Ethereum were knocked for their lack of accessibility, with newcomers struggling to understand how to manage a digital wallet.

Now the situation has changed significantly for investors. Crypto exchanges have become the norm, offering an easy path for users looking to buy and sell digital assets via simple-to-use platforms.

A few of these crypto exchanges have greatly benefited from the interest in digital coins and have been able to market themselves in splashy ways, sometimes even working with top celebrities to advertise the use of crypto. FTX was one such company — it signed sponsorship deals with with big name celebrities and even executed a branding deal for the arena of the NBA's Miami Heat team.

Despite that success, FTX recently came under severe scrutiny after multiple reports indicated the firm wasn’t as solid as it seemed beforehand. The company was close to safety when it struck an acquisition deal with its competitor Binance, but the deal was ultimately dismantled. It all led to a catastrophic collapse that has directly affected trust in digital assets.

“I think the bigger issue here is despite the fact that this technology does decentralize power, control and trust, we still do rely on large intermediaries inside of the crypto asset industry, probably more than we should or more than we really need to,” Alex Tapscott, a managing director with Ninepoint Partners, told the audience at the WEB3 & Blockchain World (W3B) event.

In the wake of the FTX crash, experts have suggested that it may not have been as accidental as it first seemed.

In a recent interview, Sam Bankman-Fried, founder and former CEO of the now-bankrupt FTX, said it was not his intention to defraud people. However, Reuters reported that Bankman-Fried moved US$10 billion of FTX customer funds to Alameda Research, a cryptocurrency trading firm owned by the executive himself; at least US$1 billion in customer funds are now gone.

The company and its leaders are facing heavy scrutiny from customers, as well as regulatory bodies like the Office of the US Attorney in Manhattan, the US Securities and Exchange Commission and the Commodity Futures Trading Commission, all of which have opened investigations into this case.

What is the future of crypto regulations?

Discussions around whether the crypto market needs more in-depth oversight from leading regulators are tricky to have as opinions vary on what’s needed and what could be too much.

“Anything that is new, that is exciting, that is transformative, will always go through this period of (time) with people trying to figure out what the risks associated with it are,” Abhishek Sinha, a partner at EY Canada and the firm's national banking technology leader, told the Investing News Network (INN).

Speaking to INN following a panel at the W3B show, Clare Adelgren, sales and operations leader for EY Blockchain, said any form of regulation should be unique, not copied from other industries.

“What we don't necessarily want is a sort of cookie-cutter (policy),” she said. “It has to be regulation that supports the underlying technology so that we don't devalue the purpose.”

Calls for regulation have reached some of the top regulators in the US in the wake of the FTX fallout.

Rostin Behnam, chairman of the Commodity Futures Trading Commission, recently asked lawmakers in Washington for more oversight when it comes to crypto. "If we don't do something, customers will continue to lose money and we're going to be right back here in a couple months," Behnam said, according to a Reuters report.

The lack of stable oversight from capable regulators was a concern that echoed around the W3B event.

“I think this reflects on the role regulators can play in this market,” Dean Skurka, president and Interim CEO at WonderFi (TSX:WNDR,OTCQB:WONDF), told INN.

When asked what kind of regulation could come following the FTX debacle, Sidney Powell, CEO and co-founder of DeFi firm Maple and a speaker at W3B, told INN he worries about rules becoming too stringent.

“There'll be a tough clampdown, probably; potentially an overreaction. But what I hope is that the regulators don't clamp down on the innovation happening in the space,” he said.

The expert instead wishes to see a new framework that "encourages prudent disclosure, prudent risk management practices and more transparency,” compared to restrictions for participation in this space.