Welcome to the “Crypto Chronicles,” a captivating series presented by Cointelegraph that takes you on a journey through the captivating history of cryptocurrency. Brought to you by Phemex, this timeline allows members of the crypto community to delve into the pivotal moments that have shaped the industry as we know it today.
In this article, we explore the period that followed the collapse of the FTX exchange in November 2022, which marked the beginning of one of the most infamous crypto winters in the history of digital assets.
The aftermath of the FTX exchange collapse is widely regarded as one of the darkest times in the crypto world. The downfall of FTX and its extensive network of over 130 subsidiaries triggered a domino effect of bankruptcies and layoffs within the Web3 industry, leading to an enduring crypto winter. During this period, the price of Bitcoin (BTC) hit its lowest point at $16,000.
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In the wake of the bankruptcy that resulted in a staggering $8.9 billion loss of investor funds, regulators were compelled to take action and develop frameworks that prioritized investor safety and transparency within the crypto exchange and service provider sectors.
In a bold move, United States regulators imposed record-breaking fines on Binance, despite the absence of evidence indicating any misappropriation of user funds. Additionally, they levied fines on smaller exchanges as a preemptive measure to prevent similar meltdowns to that of FTX.
Explore the History of Crypto. Source: History of Crypto
So, what led to the collapse of FTX?
The infamous collapse of the FTX exchange occurred just over a year and a half ago, sending shockwaves throughout global crypto markets and obliterating billions of dollars in value within a matter of days.
Essentially, FTX collapsed due to the misappropriation of user funds, resulting in enormous trading losses for its sister company, Alameda Research. The quantitative trading firm utilized FTX customer funds, which Bankman-Fried transferred without consent, to cover Alameda’s trading losses — now widely known as the “Alameda gap.”
According to Michael Lewis’ biography on Bankman-Fried, Alameda had been losing over $500,000 per day for an entire month prior to receiving its quantitative trading protocol from Gary Wang.
The misappropriation of user funds began to unravel in November 2022 when it was revealed that a significant portion of Alameda’s balance sheet was comprised of FTX’s FTT token. This revelation sparked a massive sell-off, causing the FTT token price to plummet and raising concerns about the financial stability of FTX and Alameda Research. As a result, customers rushed to withdraw their funds, pulling out a staggering $6 billion within three days. FTX was unable to meet the withdrawal demands and was forced to suspend withdrawals.
On November 11, 2022, FTX filed for bankruptcy. Bankman-Fried was subsequently arrested in the Bahamas on December 12, 2022, after U.S. prosecutors filed criminal charges against him. He was extradited to the United States in January 2023 and, on March 28, 2024, Bankman-Fried was sentenced to 25 years in federal prison.
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Related: Alameda Research FTT token transfer from September fuels wild speculations
The regulatory aftermath of the FTX collapse
The collapse of the FTX exchange prompted a hawkish response from the United States Securities and Exchange Commission (SEC), which initiated a broader crackdown on crypto exchanges in order to prevent another potential FTX-like meltdown.
In June 2023, the SEC filed lawsuits against Coinbase and Binance Exchange, alleging securities violations. The lawsuit against Binance accused the company and its founder, Changpeng Zhao, of misappropriating billions of dollars in user funds.
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Despite the absence of evidence indicating any misappropriation of user funds, Binance was charged with violating Anti-Money Laundering laws and was ordered to pay one of the largest criminal fines in history — a staggering $4.3 billion.
In the case of Coinbase, the SEC claimed that the exchange was operating as an unregistered exchange, broker, and clearing agency, and had violated securities laws by listing 13 tokens that were deemed securities. Coinbase sought to have the case dismissed, questioning the SEC’s authority over crypto exchanges. However, on March 27, the court dismissed Coinbase’s motion, allowing the SEC to proceed with its lawsuit.
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The immediate regulatory response primarily focused on prosecutions and enforcement, rather than the implementation of blockchain-specific regulations, according to Ashar Burney, the legal head of TDeFi, who stated in an interview with Cointelegraph:
Burney further emphasized that the collapse of FTX was primarily a case of “criminal fraud,” rather than a result of inadequate regulatory frameworks.
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The evolution of the regulatory landscape post-FTX
Following the collapse of FTX, crypto exchanges began to prioritize transparency, with Binance leading the way as the world’s largest exchange.
By the end of November 2022, Binance introduced its Proof-of-Reserves (PoR) system, which provides users with visibility into the underlying assets held by the exchange on their behalf. This third-party audit aims to assure users that the exchange can fulfill any potential withdrawal requests. As of April 12, Binance’s main assets were overcollateralized by at least 102%, according to its PoR page.
Inspired by Binance’s transparency efforts, other top exchanges, including Coinbase, OKX, Crypto.com, Kraken, and Bybit, followed suit.
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However, despite the implementation of new PoR audit systems, investors are still advised to conduct due diligence. Even FTX had undergone numerous financial audits that failed to uncover the fraud, as noted by TDeFi’s legal head, Burney, in an interview with Cointelegraph:
In addition to the transparency initiatives of crypto exchanges, governments worldwide have adopted a more collaborative approach to regulating the nascent crypto industry, according to James Wo, the founder and CEO of DFG, who shared his insights with Cointelegraph:
In May 2023, the European Council introduced the first comprehensive legal framework for the crypto industry — the Markets in Crypto Assets (MiCA) framework. This framework aims to protect investors through stringent transparency standards and anti-money laundering (AML) regulations.
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Thanks to the new MiCA legislation, crypto exchanges will become fully regulated entities by the end of 2024, according to Vyara Savova, senior policy lead at the European Crypto Initiative, who stated:
However, the effectiveness of MiCA will largely depend on the implementation by each member state, as explained by Savova:
Hong Kong and Dubai have also implemented crypto regulations that foster innovation, as they strive to establish themselves as global crypto hubs. Nevertheless, the most significant regulatory milestone came in January 2024, with the approval of spot Bitcoin exchange-traded funds (ETFs).
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The approval of these ETFs represents a positive development and indicates an innovation-friendly approach from U.S. regulators, according to DFG’s Wo, who expressed his views to Cointelegraph:
The U.S. ETF approval has also inspired other jurisdictions to follow suit. The Securities Regulatory Commission (SFC) of Hong Kong is expected to approve the first four spot Bitcoin ETF applications by April 15, after expediting the approval process.
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However, despite significant regulatory advancements such as ETFs and increased regulations surrounding crypto exchanges, investors are not necessarily immune to another FTX-like meltdown, as highlighted by DFG’s Wo:
Related: FTX moves to offload 8% stake in Anthropic
Looking ahead to 2024 and beyond
The collapse of FTX served as a wake-up call and prompted global regulators to collaborate in order to prevent future high-profile meltdowns. Leading economies have introduced new regulations for crypto exchanges, while Europe has set the bar by implementing the first comprehensive framework for the crypto industry.
The European MiCA framework is still a work in progress. The next major aspect of the bill will establish a marketing communication standard for crypto exchanges, which could have implications for crypto service providers in Europe, according to Vyara Savova, senior policy lead at the European Crypto Initiative, who explained:
The second consultation package for reverse solicitation guidelines under MiCA is set to conclude on April 29. The outcome of this consultation will significantly impact the final implementation of MiCA in December, as Savova outlined:
According to Ashar Burney from TDeFi, crypto service providers should anticipate increased regulatory scrutiny, including stricter disclosure and compliance requirements, leading to a more mature industry. Burney noted:
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