Is it the end of the world as we know it? One of the difficulties with writing a blog while holding down a demanding day job is that sometimes it is hard to get out a blog post before subsequent events make the post meaningless. Here is an example of blog posts that were in the process of being written/rewritten:
Monday 11/6: “Binance dumps FTT, SBF decries ‘unfounded rumors’ though leaked balance sheet may be real.”
Tuesday 11/8: “Could FTX be in trouble? Coinglass may have evidence that FTX may be short on BTC.”
Wednesday 11/9: “FTX halts withdrawals, Binance comes to the (non-binding) rescue.”
Thursday 11/10: “FTX.com may have $8bb shortfall; did Binance push it into the arms of Ch. 11?”
Friday morning brought news of a Ch. 11 filing for 132 entities affiliated with FTX, including the entities that operated as FTX.com and FTX.US. Oh, and BlockFi halted withdrawals as a result of not being able to rely on credit provided to it by FTX earlier in the summer.
The LUNA and 3AC debacles of earlier this year already made 2022 a memorable year for crypto; SBF’s folly/fraud1 makes sure that this will be a year crypto will never forget. There are, metaphorically speaking, dead bodies everywhere.
Is crypto2 dead? No. But there can be no question that things will have to change. This latest debacle has already increased the volume of demands that the crypto industry needs to be regulated (presumably by a federal regulator), and any institutional investor will need to consider holding all digital assets through custody arrangements (as opposed to trading accounts) to the extent possible.
Given the current status of Congress, it is unlikely that any laws relating to cryptocurrencies would be passed3 in the near future, and the process of creating new or amending existing regulations takes years. So expect to see regulators wielding their favorite tool, regulation by enforcement, even more in the future. Anyone active in the crypto industry or investing client funds in crypto should expect that regulators will conduct their examinations with heightened scrutiny.
1 This assessment may be premature as facts will continue to emerge; but if your ToS states “Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading” and “None of the Digital Assets in your Account are the property of, or shall or may be loaned to, FTX Trading” and you apparently knowingly loaned said Digital Assets to your affiliate to cover balance sheet holes, well, the “f” word (fraud, not the other f-word) may pop up. It definitely has occurred to others as well.
2 Whatever happens to crypto, blockchain is alive and well, notwithstanding that it is often tarred with the same brush as crypto.
3 Though, not doubt, quite a few bills will be proposed.