Crypto Investor Protection Does Not Exist

Raise your hand if you like Sam Bankman-Fried.

I didn’t think so.

“I met a representative of FTX at an event once and offered to have our token listed on the exchange for $1 million in TetherUSDT
and 30% of our token supply for their internal market makers. My b.s. meter went off and I politely refused,” says Danial Daychopan, CEO & Founder of London-based Plutus, a non-custodial crypto-linked card. “I guess many other companies in the space have had similar deals lured in front of them by FTX in the hopes of a 100x returns. This either adds a conflict of interest or puts their business at risk of becoming victims of someone else’s failure.”

Many learned the hard way, from big money investors like Sequoia Capital, to retail investors who had accounts at FTX. That money is all gone.

CoindeskDivisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet

This month’s fantastic blowup of FTX, one of the premier U.S.-based cryptocurrency exchanges along with Gemini and Coinbase, serves as a reminder to retail investors that their bitcoin is not protected the same way savings and traditional investments are protected from FTX-level fraud. Investors might have no legal recourse to recoup what was lost or stolen via cyber security breaches.

“Unfortunately, there is no such thing as client protection in the unregulated bitcoin industry,” says Paul Gray, CEO of Ironhold Capital. “Using customer funds for a purpose that wasn’t disclosed would most likely get the fund in trouble with the SEC,” he says. This is what the executives at FTX did.

“The damage has rippled across the sector, bringing down other cryptocurrency businesses and courting widespread criticism of the technology,” Gray said. Ironhold Capital published a whitepaper in September titled, “Crypto: Tulip Mania All Over Again.”

From that report. Don’t be scared, but:

“Since cryptocurrencies do not produce cash flow and are not a naturally scarce resource like gold, it is difficult to estimate their worth. From a risk-reward investment perspective, we do not consider cryptocurrency a good option to invest in as there is no real way to identify the upside or downside with this investment. We believe the value of most cryptocurrencies will go to zero or some small notional value in the long run.”

FTX and this summer’s Luna coin crash are “clear examples of human greed, mismanagement, and a profound lack of due diligence from investors,” says Lan Yue, COO of Bit.com, a crypto exchange offering spot, futures and options trading. “These crises are problematic for the industry as these are the exact problems that decentralized digital currency is supposed to solve.”

FTX offered advanced trading features which were popular among investors. But the exchange’s downfall serves as a dire warning to cryptocurrency investors about protection.

The FTX crisis not only affected the companies that cooperated with the exchange, but also entrenched crypto companies deeper into bear territory. Coinbase shares are down 82% this year.

Many companies are now faced with even greater difficulties in trying to survive the bear market.

Early reports on Gemini’s outflows this week detailed hundreds of millions of dollars in the wake of the FTX disaster. New data shows that outflows from that exchange have climbed by over $1 billion. Data from Merkle Science, showed the total amount of outflows from Gemini is much more significant than what was originally thought post-FTX. They found that Gemini’s total outflows starting November 16 have amounted to $1.163 billion, with roughly $550 million in inflows across bitcoin, EthereumETH
, bitcoin cash, LitecoinLTC
, and DogecoinDOGE
.

“It is likely that (the FTX fallout) is not yet final,” says Serhii Zhdanov, CEO of EXMO.com, a cryptocurrency exchange.

The FTX bankruptcy will provide the government a reason for regulators to tighten their requirements for crypto companies, which will lead to stronger centralization to ensure full control from governments.

One can imagine the likes Coinbase buying Gemini or Kraken, and the Nasdaq buying all three. Or one of the big exchanges emerging as the Nasdaq of crypto and that is the end of that.

Moreover, the FTX fallout will further push central banks to perfect the construction of a nationwide blockchain platform to hold a programmable central bank digital currency. At which point, the fate of bitcoin and other competing digital currencies remains unclear.

White House Press Secretary Karine Jean-Pierre told reporters during a press briefing on November 10 that the Biden administration was aware of the recent developments at FTX and was monitoring the situation.

In March, President Biden signed an Executive Order pushing government agencies to work on a whole-of-government approach to regulating the crypto industry.

Treasury Secretary Janet Yellen, Gary Gensler, Chair of the Securities and Exchange Commission and Cynthia Lummis (R-WY), author of the Responsible Financial Innovation Act, introduced in the Senate in June, all called for more stringent control and regulation of digital assets following the Nov. 11 bankruptcy of FTX.

“In other regulated exchanges, you would have segregation of customer assets,” Yellen said, speaking of exchanges like the Nasdaq. “The notion you could use the deposits of customers of an exchange and lend them to a separate enterprise that you control to do leveraged, risky investments—that wouldn’t be something that’s allowed.”

Bankman-Fried conceded in a Twitter thread on Nov. 10 that FTX had “poor internal labeling” of customer accounts.

“The recent events in cryptocurrency will lengthen the ‘crypto winter’ until some degree of guardrails is placed,” says Milton John Mathew, CEO of Terareum, a centralized exchange like FTX registered in the U.S., the United Arab Emirates and India. “The Lummis bill should gain more traction in the House and Senate Committees (because of the FTX bankruptcy). We need investor and consumer protection in the digital asset space.”

Events related to the investigation into the activities of FTX Trading Ltd — one of Bankman-Fried’s many FTX exchange-linked subsidiaries — impacted the price of bitcoin, falling below $20,000 for the first time in two years.