The cryptocurrency industry has began to build itself back from the catastrophic collapse of FTX but has still failed to cause significant disruption to traditional finance one year on, experts claim.
FTX, formerly the second-largest crypto exchange in the world, filed for bankruptcy on 11 November 2022 causing a shockwave of decline through the industry.
The company collapsed following a liquidity crisis, as customers demanded withdrawals of up to $6bn over fear their assets were no longer safe.
FTX founder Sam Bankman-Fried reportedly reached out to venture capitalists to save the company, before turning to rival exchange Binance to close a deal. Binance announced it was going to buy out FTX, but the company backed out just a day later citing concerns the company had been mishandling customer funds.
On 2 November 2023, Bankman-Fried was found guilty of seven charges related to fraud and money laundering following a month-long trial in New York.
The FTX bankruptcy caused regulators to crack down on the industry. Restrictions have continually been getting tighter throughout 2023 as many regulators remain sceptical about the industry.
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In May, the UK Treasury Committee released a report arguing that unbacked cryptocurrencies, like Bitcoin and Ethereum, pose a significant risk to consumers.
Bitcoin and Ethereum, which make up two-thirds of all cryptocurrency, are not backed by an underlying asset. This can lead to volatility in prices and risks money invested in them to be lost, the treasury committee said.
Richard Cannon, partner at Stokoe Partnership solicitors, previously told Verdict that he believes “regulated economies must confront and engage with the evolution of finance”.
Crypto is building but it has a long way to go
Before the fall of FTX, the industry was enjoying the meteoric highs of Bitcoin in 2021. There was a constant flash mob of social media influencers shilling nonfungible tokens (NFTs) and meme coins were all the rage.
Despite the closing jaws of regulators in 2023, some of the industry is slowly recovering, although not NFTs and memecoins.
Bitcoin has made back all of its losses following the collapse of stable coin TerraUSD in May 2022, an event which became part of the catalyst in the demise of FTX.
The market value of all cryptocurrencies declined by 64% in 2022 to below $800bn, pushed on by the collapse of FTX and Celsius, according to research company GlobalData. In May, the value had bounced back in 2023 to reach $1.1trn.
Despite the highs and lows of the industry throughout the years, the crypto market is far from significantly disrupting traditional finance, according to research company GlobalData in its Thematic Intelligence: Cryptocurrencies (2023) report.
The industry remains in its infancy, even after the highs of 2021 and build back of Bitcoin in 2023, the company said.
“Although often dubbed as digital gold, bitcoin’s value would need to multiply 25 times to match the value of gold as of May 16, 2023,” it added.
At its November 2021 peak, the total market value of all cryptocurrencies stood around 4% of global GDP, GlobalData reported.
For perspective, at the height of the “dot.com boom” in 2000, the combined market cap of US technology stocks represented a third of global GDP.
“Thus, in economic terms, the global impact of cryptocurrencies remains modest,” according to GlobalData.
The future for a regulated crypto
The fall of crypto in 2022, spurred on by the FTX bankruptcy, has sparked a significant interest in regulation.
However, much of the industry remains unregulated or regulated by disparate approaches, leading to confusion amongst crypto companies.
The good news for crypto is that while regulators are acting tougher, the narrative from governments has changed from outright bans to implementing proper regulation, GlobalData said.
The EU, for example, has led the way with its Markets in Crypto-Assets bill, which will introduce tougher and more consistent rules for crypto companies across the EU.
The US released the Comprehensive Framework for Responsible Development of Digital Assets in 2022, this outlined the policy recommendations of various federal agencies after six months of studying the digital asset industry.