Introducing the “Crypto Chronicles,” a captivating series brought to you by Cointelegraph that delves into the most significant moments in the history of cryptocurrency. Powered by Phemex, this timeline offers crypto enthusiasts the opportunity to revisit and explore the events that have shaped the industry into what it is today.
In this article, we will be looking at the period following the collapse of the FTX exchange in November 2022, which triggered one of the most infamous crypto winters in the history of digital assets.
The aftermath of the FTX exchange’s downfall is widely regarded as one of the darkest periods in the crypto world. With over 130 subsidiaries under its belt, FTX’s collapse set off a domino effect of bankruptcies and layoffs among Web3 firms, leading to one of the longest crypto winters in history. During this time, the price of Bitcoin (BTC) hit its lowest point at $16,000.
The bankruptcy of FTX and its subsidiaries prompted regulators to take action and develop frameworks that prioritize investor safety and transparency in crypto exchanges and service providers. In a bold move, U.S. regulators imposed substantial criminal fines on Binance, despite no evidence of misappropriation of user funds. Smaller exchanges also faced fines as regulators aimed to prevent future FTX-like meltdowns.
So, how did the FTX exchange collapse? The infamous collapse occurred nearly a year and a half ago, causing shockwaves throughout global crypto markets and wiping out billions of dollars in value within a matter of days. The collapse was primarily due to user fund misappropriation, resulting in massive trading losses for Alameda Research, FTX’s sister company. Alameda Research used FTX customer funds transferred by Bankman-Fried without consent to cover its own trading losses, now known as the “Alameda gap.” Prior to receiving its quantitative trading protocol from Gary Wang, Alameda suffered daily losses of over $500,000 for a month, as revealed by Michael Lewis in his biography on Bankman-Fried.
The unraveling of the user fund misappropriation began in November 2022 when it was discovered that a significant portion of Alameda’s balance sheet consisted of FTX’s FTT token. This revelation triggered a major sell-off, causing the price of the FTT token to plummet and raising concerns about the financial health of FTX and Alameda Research. Customers withdrew up to $6 billion within three days, overwhelming FTX, which was forced to suspend withdrawals. FTX eventually filed for bankruptcy on November 11, 2022. Bankman-Fried was arrested in the Bahamas on December 12, 2022, after U.S. prosecutors filed criminal charges against him. He was extradited to the U.S. in January 2023 and sentenced to 25 years in federal prison on March 28, 2024.
The collapse of the FTX exchange triggered a strong response from the United States Securities and Exchange Commission (SEC), which launched a crackdown on crypto exchanges to prevent future FTX-like meltdowns. In June 2023, the SEC filed lawsuits against Coinbase and Binance Exchange for alleged securities violations. In the case against Binance, the SEC accused the company and its founder, Changpeng Zhao, of misappropriating billions of dollars of user funds. Despite the lack of evidence of misappropriation, Binance was charged with violating Anti-Money Laundering laws and was hit with one of the largest criminal fines in history, amounting to $4.3 billion. The SEC also sued Coinbase, claiming that the exchange operated as an unregistered exchange, broker, and clearing agency, and violated securities laws by listing 13 tokens that were deemed securities.
While the regulatory response initially focused on prosecutions and enforcement rather than implementing specific blockchain regulations, there has been a shift towards greater transparency among crypto exchanges. Binance, the world’s largest exchange, led the way by launching its Proof-of-Reserves (PoR) system at the end of November 2022. This system allows users to see the amount of underlying assets held by the exchange on their behalf, providing assurance that the exchange can meet withdrawal requests. Other major exchanges, including Coinbase, OKX, Crypto.com, Kraken, and Bybit, have followed suit.
Despite these transparency efforts, investors still need to exercise due diligence, as even FTX had undergone numerous financial audits that failed to uncover the fraud. Governments around the world have also taken a more collaborative approach to regulating the crypto industry. In May 2023, the European Council adopted the Markets in Crypto Assets (MiCA) framework, the first comprehensive legal framework for the crypto industry. MiCA aims to protect investors through stricter transparency standards and anti-money laundering rules. However, the effectiveness of MiCA will depend on how each member state implements the framework.
Hong Kong and Dubai have also introduced crypto regulations to foster innovation and establish themselves as global crypto hubs. In January 2024, the approval of spot Bitcoin exchange-traded funds (ETFs) marked a significant regulatory milestone. The United States SEC approved ten spot Bitcoin ETFs, allowing traditional investors to gain exposure to BTC through publicly-traded funds. This approval has inspired other jurisdictions, such as Hong Kong, to accelerate the approval process for their own spot Bitcoin ETFs.
While these regulatory developments and the introduction of ETFs signal progress and a more innovation-friendly approach from regulators, investors are not necessarily protected from another FTX-like collapse. The lessons learned from the FTX collapse have prompted global collaboration among regulators to prevent similar incidents. Leading economies have implemented new regulations for crypto exchanges, and Europe’s MiCA framework has set the standard for other regulators. The next major step for MiCA will be establishing a marketing communication standard for crypto exchanges, potentially impacting crypto service providers in Europe.
Looking ahead, crypto service providers may face increased regulatory scrutiny, leading to more stringent disclosure and compliance requirements. This could contribute to a more mature and secure industry. Despite these efforts, investors should remain vigilant and conduct thorough due diligence to mitigate risks. The regulatory landscape continues to evolve, and the industry must adapt to ensure the long-term success and stability of cryptocurrencies.