Eight weeks since FTX collapsed, crypto is still reeling from a stunning meltdown. In fact, the contagion is spreading faster.
Following the arrest and extradition of former FTX CEO Sam Bankman-Fried and the guilty pleas of his two close associates, more companies have been snagged in the crisis, which has upended the once fast-growing industry.
On Tuesday, Coinbase CEO Brian Armstrong announced a second round of layoffs, citing “fallout from unscrupulous actors in the industry,” and warning that “there could still be further contagion.”
Last weekend, Wyre responded to reports that it was shutting down by announcing that the San Francisco crypto payments startup was “exploring strategic options for our company that will enable us to navigate the current market environment.” Wyre also said it was limiting withdrawals to “no more than 90% of the funds currently in each customer account.”
Silvergate saw its stock plunge more than 40% over the past week, after the publicly traded bank, which caters to crypto clients, admitted being hit by what was essentially a bank run triggered by the FTX collapse. Silvergate said it was forced to sell assets at a loss to cover $8.1 billion worth of withdrawals.
Binance is reportedly under investigation by the Justice Department which has subpoenaed U.S. investment firms seeking records of their dealings with crypto’s largest marketplace, according to the Washington Post. Binance, which is barred from operating in the U.S., has reportedly been accused of allowing the platform to be used for money laundering and other illicit finance.
Analyst Jason Mikula, publisher of the Fintech Business Weekly, said “the implications of the post-FTX collapse” is becoming more evident. “The obvious one grabbing the most headlines is the risk of deposit flight,” he told The Examiner.
Many banks rushed to dabble in a hot crypto market by seeking “to capture the deposits that were flowing into the digital asset ecosystem,” according to an S&P Global Market Intelligence report.
“Now, concerns have escalated as the market capitalization of cryptocurrency fell to about $811 billion as of Dec. 20 from nearly $3 trillion in November 2021,” the report said.
The crypto contagion has highlighted criticisms of an industry that skeptics have warned is fraught with fraud and could destabilize the financial system
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John Reed Stark, a former SEC official who once led the regulator’s Office of Internet Enforcement, argued that the fallout from the FTX crash underscored the “wild west” nature of crypto as a “wholly unregulated” industry.
“No consumer protections, no oversight, no inspections,” he told The Examiner. “They do whatever they want. They wake up in the morning and they freeze withdrawals. There’s no consequences from a regulatory perspective.”
The Enron-like scandal that triggered the meltdown also has reinforced the view of crypto as a shady industry. Stark said there could be more revelations as the contagion spreads: “I think there’s a lot of story left to unfold, a lot of defendants left to be charged.
“I don’t think I’ve ever known of securities fraud with so many potential informants, turncoats, tipsters, whistleblowers,” he added. “You have such outrageous fraud and it stretches across so many different companies because of the incestuous nature of the ecosystem.”
But crypto executives and investors push back on pessimism, offering a more upbeat take on what’s in store for the industry.
“Within the next few months, you will see the full extent of the contagion,” investor Chris McCann, a partner at the Silicon Valley venture capital firm Race Capital, told The Examiner. “I don’t think this necessarily kills the space. But I do think this gets most of the participants to take a deep breath and see what’s out there, and see who’s dead, who’s not dead.”
Cathy Yoon, chief legal officer of MPCH, said that the downturn has definitely had an impact on the crypto infrastructure technology company’s clients who are crypto natives and might not necessarily be in the best position to still be in business right now.”
But many companies in traditional finance, which have generally been more cautious in adopting new technologies, are still interested in exploring blockchain and crypto. Crypto, she argued, will survive the crisis.
“It ain’t going away. I can tell you that,” Yoon told The Examiner. “From 2021 to 2022, We just saw crazy valuations. We just saw a lot of excess, focused on chasing outsized returns as opposed to focusing on the concept of decentralization and what can actually happen in terms of different use cases. Everything was about making as much money as possible.”
