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Three ways the FTX disaster will reshape crypto




FTX's collapse shakes crypto to its core.  The pain may not be over

The collapse of FTX, once a $32 billion crypto exchange, has shattered investor confidence in cryptocurrencies. Market players are trying to gauge the extent of the damage it has caused – and how it will reshape the industry in the years to come.

Sam Bankman-Fried, FTX’s former boss who resigned on November 11, was arrested in the Bahamas last week. He has been charged by the US government with wire fraud, securities fraud and money laundering.

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FTX connected buyers and sellers of digital currencies that bitcoin, as well as derivatives. However, the company did more than that, reportedly dipping into customer accounts to make risky trades through sister firm Alameda Research.

“It’s hugely disappointing for investors, or more so devastating for investors,” said Louise Abbott, a partner at law firm Keystone Law specializing in crypto asset recovery and fraud.

It’s clear that the FTX drama could radically reshape crypto for years to come. Here are three big ways the industry could change.

1. Regulation

First, the will to disaster seems to make regulators act.

Crypto as an industry is still largely unregulated, meaning investors don’t have the same protections they would have by placing their money with a licensed bank or broker.

That may be about to change. Governments in the US, EU and UK are taking steps to clean up the market.

If there is no regulation, investors are left without the protection they need.

Louise Abbott

Partner, Keystone Law

The EU’s crypto asset markets are the most comprehensive regulatory framework to date. It aims to reduce risk for consumers buying crypto, and make exchanges accountable if they lose investors’ assets.

But MICA will not start for another 12 months. Keystone Law’s Abbott said it is important that regulators act quickly.

“People need to see that steps are being taken to regulate it. And I think if we are able to offer some regulation, we will build confidence,” she said. “If there is no regulation, investors are left without the protection they need.”

Read more about technology and crypto from CNBC Pro

The saga has set back the adoption of cryptoassets by “one or two years,” according to Evgeny Gaevoy, founder and CEO of crypto market maker Wintermute.

“Everything that failed this year, if you look at Celsius, Three Arrows, FTX now — all those guys took the worst of both worlds because they weren’t fully decentralized, and they weren’t properly centralized either,” he said.

For Kevin de Patoul, CEO of crypto market maker Wintermute, the biggest lesson from FTX’s bankruptcy is that “you can’t have complete centralization and a lack of oversight.”

“We’re evolving into a world where you’re going to have both centralization and decentralization,” he said. “When you have that centralization, you have to have proper oversight and a proper balance of power.”

2. Consolidation

I don’t think all the dominoes have fallen out of the contagion. The effect this will have is that many projects will not actually have funding…

Mary Flament

CEO, Near Foundation

“The challenge for the whole space when you think about contagion is that FTX and Alameda were extremely active investors in this space,” said Peter Smith, CEO of Blockchain.com, in a CNBC-moderated speech at a crypto conference in London.

The Near Foundation, which is behind a blockchain network called Near, was among the firms that took investment from FTX. Marieke Flament, Near’s chief executive, said the firm had limited exposure to FTX – although the collapse was still “a surprise and a shock.”

“I don’t think all the dominoes have fallen out of the contagion,” Flament said. “The consequence of this is that many projects will not actually have the funds, and thus the resources, for them to continue and develop.”

Watch CNBC's full interview with Binance CEO Changpeng Zhao

Fears have risen over the financial health of other major crypto exchanges following FTX’s failure. Since early 2020, around 900,000 bitcoins have flowed out of exchanges, according to data from CryptoQuant.

Binance, the world’s largest exchange, is facing questions about the reserves it has to stop customer funds. The company saw billions of dollars in outflows in the past week.

Currently, there is no reason to suspect that Binance faces any risk of bankruptcy. But exchanges like Binance and Coin base faces a gloomy market backdrop going forward amid falling trading volumes and account balances.

Experts believe they will continue to play a role – although their survival will be determined by how seriously they take risk management, governance and regulation.

“There will be exchanges that do things the right way and that will survive,” Abbott said.

As for tokens – bitcoinwhich is the longest-lived digital currency, may be better positioned than its smaller rivals.

“My bet would be that bitcoin and DeFi [decentralized finance] is decoupled from the rest of crypto and actually starts to have a life of its own,” Wintermute’s Gaevoy told CNBC.

3. Innovation

Despite the depressed state of the crypto markets, and the toll it has taken on investors, the digital asset industry is likely to pull through.

Proponents of “Web3,” a hypothetical blockchain-based internet, expect 2022’s crypto winter to pave the way for more innovative uses of blockchain, rather than the speculative uses crypto is associated with today.

“What we see a lot are companies that have digital innovation arms or metaverse innovation arms,” ​​Flament said. “They understand that the technology is here. It’s not going to go away.”

NFTs, or non-fungible tokens, can change users’ relationships with properties in, for example, games and events. These are digital assets that track ownership of unique virtual objects on the blockchain.

Crypto enthusiasts want to remake the internet with 'Web3.'  Here's what that means

“Digital assets will be an increasing part of our lives, whether it’s a collectible, a ticket, value, identity,” Ian Rogers, chief experience officer at crypto wallet firm Ledger, told CNBC. “Identity can be membership… [people] using NFTs they own to access a certain event or something like that.”

But for many, there is still a learning curve to overcome. “It’s hard to create wallets and store keys and go through different platforms,” ​​Cordel Robbin-Coker, CEO of mobile gaming firm Carry1st, told CNBC at the Slush startup conference in Helsinki, Finland.

Robbin-Coker compared Web3 today to the internet in the early 90s. “It was clunky. You’d call, it took four minutes to get on, the original browsers weren’t very intuitive,” he said.

“It’s really the early adopters that really engage at that stage. But over time, companies build smoother interfaces. And they cut steps out of that.”



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