It is almost exactly a year to the day that crypto exchange FTX filed for bankruptcy after it emerged that nearly $10 billion in customer funds was being used to prop up its sister trading firm, Alameda Research. In the space of less than a fortnight, the exchange, once valued at a staggering £32 billion, became synonymous with crypto’s ‘wild-west’ image and an industry in crisis.
As we approach the one year anniversary since the collapse of FTX, here are the three main ways it has impacted the crypto sector:
Regulation takes centre-stage
Whilst regulators were already in the process of bringing crypto under traditional financial frameworks, the revelations around FTX’s lack of risk management practices and illicit activity have placed added incentive to introduce wide-ranging regulations.
In April 2023, the European Union passed its landmark Markets in Crypto Assets (MiCA) legislation, becoming the first major western jurisdiction to introduce comprehensive crypto regulation.
Under MiCA, any company seeking to offer crypto services within the bloc – whether that’s custody, trading, portfolio management or advice – will need to be authorised by one of the EU’s 27 national financial regulators and prove that it isn’t misleading potential buyers. The framework also contains provisions to curb market abuse and insider dealing – similar to guardrails set up for traditional finance.
In June 2023 the UK followed similar suit, passing its Finanical Services and Markets Act. Under the act, firms engaging in activities relating to stablecoins or crypto assets for payment will become subject to numerous regulatory requirements. This includes Financial Conduct Authority (FCA) authorisation, anti-money laundering requirements as well as more robust risk management and governance.
The introduction of regulation has generally been received well by both the crypto and traditional financial services sector. Alisa DiCaprio, Chief Economist at R3, said: “Smart regulation for crypto like MiCA is critical in providing the required guidelines on how the underlying distributed ledger technology for these assets is applied. This will serve as a platform for future innovation which is vital as global competition across technology and financial services climbs.”
A challenging fundraising environment
According to KPMG’s most recent Pulse of Fintech Report, funding into crypto and blockchain stood at a mere $4.4 billion globally in the first half 2023, compared to $25.4 billion during the entire of 2022.
Like the tech space more broadly, crypto and blockchain has seen investors pull back as a result of rising inflation, high interest rates and concerns around potential recession.
However, the KPMG report specifically references the collapse of “several high-profile crypto companies in 2022” as having damaged investor confidence. The subsequent renewed focus on due diligence and governance is therefore likely to have also contributed to the slowing speed of crypto deals even further.
This is not to say that fundraising has dried up completely. In April 2023, crypto infrastructure provider LayerZero raised $120 million in its Series B funding round, with investment firm Andreessen Horowitz amongst the 33 backers. Metaverse startup also Futureverse raised $54 million its Series A in July 2023, whilst Open AI’s Sam Altman raised $115 million for Worldcoin’s Series C funding round.
This suggests that whilst venture capital is harder to come by, the market remains friendly to the right type of investors and strategies.
Continued focus on the underlying technology
Whilst interest in crypto itself remains relatively subdued, jurisdictions around the world have continued to embrace blockchain-based solutions to enhance efficiency across capital markets and experiment with asset tokenization.
In March 2023, the European Union launched its DLT pilot regime. The regime acts as a ‘regulatory sandbox’ for financial institutions to apply distributed ledger technology at scale (DLT) at scale across a range of use-cases, including the issuance, trading, settlement of tokenised stocks, bonds and funds.
The UK launched its pilot equivalent in July 2023, the Digital Securities Sandbox, which will enable participating firms to experiment with DLT in a regulated framework by temporarily modifying certain legislation. Like the EU’s DLT pilot, the objective is to assess whether to retain DLT-based market infrastructure on a permanent basis.
Some financial services companies are moving ahead with tokenization outside of a sandbox ‘test’ environment. HSBC, for example, has tokenized ownership of physical gold held in its London vault, whilst last month Euroclear settled its first digital bond on its newly launched digital financial market infrastructure. These are not sandboxes or proof-of-concepts; they are real-world examples and highlight impact that tokenization is having on traditional financial infrastructure.
The impact of FTX’s collapse is still being felt across the crypto ecosystem, with its former CEO, Sam Bankman-Fried, potentially facing decades in prison.
For some, the spectacular downfall points to an industry riven with risky and wrongful practices. For others, crypto has the potential to revolutionise the way we send and receive money, and the fallout will ultimately direct crypto onto a safer, more regulated path.
It’s hard to know where crypto is heading next, but what is clear is that interest in the underlying distributed ledger technology will continue to grow as the gap between traditional and decentralised finance narrows.
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