So where do we go from here?
The stunning collapse of FTX on November 8 has sparked outrage, demands for increased regulation, and calls for the arrest of Sam Bankman-Fried, the founder of the Bahamas-based cryptocurrency exchange.
Bitcoin was off slightly to $16,482.96 on Nov. 17, according to data firm CoinGecko. Ether, the native currency of the ethereum blockchain, was down nearly 1% to $1,190.44, while dogecoin lost 1.5% to $0.083670.
Treasury Secretary Janet Yellen said in a November 16 statement that "the recent failure of a major cryptocurrency exchange and the unfortunate impact that has resulted for holders and investors of crypto assets demonstrate the need for more effective oversight of cryptocurrency markets."
Yellen said that the Treasury Department and other regulators have identified risks in the crypto markets, such as co-mingling of customer assets, lack of transparency, and conflicts of interest, which "were at the center of the crypto market stresses observed over the past week."
"We have very strong investor and consumer protection laws for most of our financial products and markets that are designed to address these risks," she said. "Where existing regulations apply, they must be enforced rigorously so that the same protections and principles apply to crypto assets and services."
Pressure to be More Transparent
She added that the federal government, including Congress, "also needs to move quickly to fill the regulatory gaps the Biden Administration has identified."
Winston Ma, managing partner of CloudTree Ventures, said a regulatory crackdown on crypto is "seemingly inevitable" following the bankruptcy.
"Regulators from various areas are now scrutinizing the FTX situation, but the Security Exchange Commission is at the frontier," said Ma, author of "Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse."
Ma said the SEC could essentially create crypto trading rules through enforcement, such as requiring crypto exchange to register.
"Operating licenses will be harder to get, while companies will be under pressure to be more transparent," he said. "Furthermore, tokens may be categorized as securities. Token’s issuance and trading may be subject to securities regulation. And the market may see tighter custodian rules for crypto assets."
In addition to SEC rules, he added, "the FTX bankruptcy may also accelerate the regulation of stablecoins in the U.S."
"It is stablecoins’ interaction with a traditional banking system that has led regulators to fret about the impact they could have on financial stability," Ma said. "Even before the FTX bankruptcy, Yellen has been calling for stablecoin regulations every several months."
'A Risk-Off Environment'
Billy Endres, a cryptocurrency expert with Finder, said that over the past year, the U.S. Dollar Currency Index has outperformed the vast majority of the crypto market -- at one stage, gaining close to 20%.
"A rising U.S. dollar and consistent rate hikes have led to a risk-off environment across traditional and cryptocurrency markets, with many investors opting to cash out of their positions," he said. "This has impacted the majority of digital assets, most of which have fallen over 80% from 2021 all-time highs."
Endres said that the macro-environment has undeniably played a significant role in the magnitude and duration of this bear cycle.
"After a long year, the DYX has finally broken down its structural support trendline -- typically a bullish sign for crypto markets," he said. "However, due to the FTX meltdown, the market has not responded positively."
Endres said that the meltdown has left "many traders out of pocket and spooked others out of the market altogether, delaying the mainstream adoption and recognition we were all counting on."
"That said, for those remaining in the space, there's no point dwelling on what could have been," he said. "The crypto community remains strong, and the bear market has proven on countless occasions to be the best time to build. If the macro market remains bullish, crypto will likely respond sooner than expected."
'A Flight to Quality'
David Lesperance, managing partner of immigration and tax adviser Lesperance & Associates, said investors will be asking tough questions about crypto exchanges and stable coins.
"If the answers are not immediate, provable, and credible then that exchange or stable coin will see a similar bank run," he said. "There will be a 'flight to quality' for those exchanges and stable coins which pass this scrutiny."
In addition, Lesperance said, FTX and other failed exchange account holders will go through the same bankruptcy process as the holders of Celsius Network, which filed Chapter 11 bankruptcy on July 13.
This would include years of litigation; full public disclosure of their financial dealings with that exchange/coin as they are all listed as unsecured creditors; and, if not, he said, "a total loss, then boot camp haircut."
"U.S. and other regulators will be doing a detailed autopsy on all the failed exchanges, stable coins, other coins to determine if there was activity relating to criminal fraud," Lesperance said.
He said that what is left of the crypto sphere will be under the same regulation as currently exists for brokerages, banks, and securities issuers including "Know Your Customer," anti-money laundering measures, and audited financials and reserves.