FTX’s Collapse Could Spell the End for Unregulated Cryptocurrencies

FTX’s Collapse Could Spell the End for Unregulated Cryptocurrencies
The FTX Arena logo, in Miami, Nov. 12, 2022 (AP photo by Marta Lavandier).

Almost a month ago, the FTX exchange—the largest trading platform for cryptocurrencies—collapsed, after a bank run by customers seeking to withdraw their holdings overwhelmed the exchange’s liquidity. With a value of over $32 billion, and links to many other similar exchanges, FTX’s collapse rattled the overall market for cryptocurrencies. FTX’s founder and CEO, Sam Bankman-Fried, who was until recently a media darling of the crypto industry, is now being investigated for fraud.

For now, it’s still unclear how much of the collapse of FTX was due to blatant fraud and how much of it came down to people not understanding the industry model, which essentially mirrors a Ponzi scheme whereby the money of new investors is used to pay off old investors’ “returns.” In any case, unlike previous abrupt market reversals for cryptocurrencies and even instances of hackers looting the assets of entire platforms, the collapse of FTX seems to have shattered the “crypto mythology,” with some now identifying cryptocurrencies as a “scam.” Regulation of the industry could be coming, which could signal its death knell, given that a large part of cryptocurrencies’ perceived value is based on the absence of government involvement with them.

In fact, advocates of cryptocurrencies have long argued that the new technology behind them would break the government monopoly on currency regulation, marking the dawn of a new era of finance. The implications of FTX’s collapse are therefore far-reaching, even into the realm of international politics, because it illustrates why this sort of “disruption” is unlikely in the realm of currency control, which has historically been and will remain the domain of governments.

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