The cryptocurrency industry anticipates an uncertain future

Not long after several Wall Street banks collapsed in 2008, a nine-page document circulated on a little-known mailing list, proposing a financial system that would not depend on any “trusted third party.”

The document was the basis for the cryptocurrency industry. Using far-reaching and idealistic language, his supporters pledged to do business fairly and transparently, rejecting the high-risk practices of a small number of powerful financial firms that caused the Great Recession.

But last month, the shares of a single cryptocurrency firm — the $32 billion FTX exchange — plunged the emerging industry into its own version of a 2008-style crash. Once considered a safe market for people to trade virtual currencies, FTX filed for bankruptcy after the equivalent of a bank run, forcing industry executives, investors and enthusiasts to grapple with how a technology meant to correct the shortcomings of traditional finance ended up replicating them.

Executives who just a year ago reveled in the seemingly relentless growth of cryptocurrency are now scrambling to prove they can learn from mistakes and recapture the industry’s early ideals. Binance, the world’s largest exchange, announced last month that it would disclose more information about its financials and hire independent auditors to review those disclosures. Coinbase, the largest cryptocurrency exchange in the US, proclaimed that it was committed to a “decentralized system where you don’t have to trust us.”

Many supporters are pushing for more drastic reforms, urging investors not to store their digital assets with large companies and instead turn to more experimental platforms that run solely on code.

But despite all the promises of change, the FTX crash shows just how far crypto is from meeting its original goals and gaining mainstream acceptance.

The stock crash compounded months of losses in the virtual currency market triggered by a devastating crash in the spring that played out amid a broader pullback in risky assets. The capsizing sent some cryptocurrency firms into bankruptcy. Bitcoin, the original and most popular cryptocurrency, is trading for less than $17,000, down 75 percent from its peak of nearly $70,000 a year ago.

The cryptocurrency industry has recovered after previous declines. But FTX’s collapse has been widely described as the worst moment in the short history of the industry.

Initially, the primary use of cryptocurrencies was criminal. Thieves and drug dealers used Bitcoin to transfer money out of banks. But technology has evolved to enable more sophisticated financial applications, such as applying for and making loans.

Cryptocurrency trading became increasingly centralized, with transactions taking place on a few major exchanges, including Binance, FTX, and Coinbase.

The value of cryptocurrencies skyrocketed last year and in 2022, until May. Then a popular cryptocurrency called Luna crashed, sending the crypto economy into a free fall. Enthusiasts lamented the onset of a “crypto winter” of depressed prices and waning enthusiasm.

In the midst of the crisis, FTX was considered a relatively reliable force. Its founder, 30-year-old Sam Bankman-Fried, bailed out struggling companies and earned a reputation as a benevolent figure.

Then last month, a run on deposits exposed an $8 billion hole in FTX’s accounts. The company declared bankruptcy.

Other companies linked to FTX began to falter. On November 28, crypto lender BlockFi, one of the companies FTX had bailed out in the spring, filed for bankruptcy.

Since FTX’s collapse, some enthusiasts have flocked to smaller companies in the field of decentralized finance, which allows transactions to be made on a publicly visible, code-governed system. But decentralized finance has proven vulnerable to hackers, who have drained billions of dollars from projects.

In interviews with The New York Times, Bankman-Fried sometimes seemed distraught over FTX’s bankruptcy, and sometimes flippant. “You know,” he said in one, “the crypto winter has officially spread.” He wasn’t falling short? “Yes,” he replied. “Sadly”.

By: DAVID YAFFE-BELLANY