FTX fall: Tighten crypto curbs

The recent meltdown of a leading crypto exchange FTX and its domino effect on the cryptocurrency markets worldwide has many lessons to offer, to market regulators, institutional investors, and retail investors looking for good returns. FTX was not a bit player - the Bahamas-based crypto exchange was the third largest in the world and funded by some of the big names in the global financial markets such as Sequoia, Temasek, Ontario Teachers’ Pension Plan, and SoftBank.

A few months ago it was valued at $32 billion and in a sudden turn of events it declared itself bankrupt on November 11. The trouble began when reports of links between FTX and an asset-trading firm called Alameda Research emerged. There were suggestions that customers’ funds have been transferred from FTX to Alameda.

Soon FTX’s rival and the world’s leading crypto exchange Binance announced it would sell its holdings of FTT tokens, a crypto that reportedly comprises much of Alameda’s assets. This led to the panic withdrawal of funds from FTX, and the company was forced to announce that it was “unable to process withdrawals”.

The FTX empire collapse has wiped out the entire $16 billion fortune of co-founder Sam Bankman-Fried, which is one of the greatest-ever destructions of wealth in history. The prices of other leading cryptocurrencies, Bitcoin and Ether, also plummeted. This has shaken investor confidence in the already troubled industry that was struggling to gain mainstream credibility.

After the FTX bankruptcy, the total market value of cryptocurrencies has plummeted below $1 trillion from $3 trillion in 2021. At the very outset, trading in assets with no underlying fundamental value on loosely regulated exchanges is a risky endeavour.

Company shares have a fundamental value based on the dividend paid from the company’s profits, real estate has a fundamental value in terms of rent earned or higher proceeds from a property sale, bond depends on the amount of interest it pays, while gold has some practical uses, for jewellery or for industrial use.

But cryptocurrencies have no such fundamental value. It relies heavily on funds injected by new investors, rather than on future returns based on the intrinsic value of the assets themselves. The speculators try to sell them to someone else before the price collapses. In short, it is akin to a Ponzi scheme. The FTX collapse has finally woken up the regulators.

The US Federal Reserve wants the government to impose regulation on cryptocurrencies. Michael Barr, the Fed’s vice chair for supervision, has called for a ‘strong guardrail’ to protect the crypto investors and consumers. India, however, managed to stay relatively unscathed thanks to a cautious approach of the government and the Reserve Bank of India.

Governments world over must be cognizant of the threat posed by such speculative assets and formulate laws to regulate them in order to protect their citizens. Lastly, the FTX collapse exposes the serious drawbacks in the due diligence carried out by topnotch institutional investors, who failed to detect the questionable operation that FTX was running and continued to back them. This also lured many retail customers, who lost out on their hard-earned money