FTX Collapse
Cryptocurrency is having a tough year. After hitting dizzying heights of valuation and setting its sights on revolutionizing banking, finance, and consumer payments, crypto has run into some very choppy waters. The plunging value of Bitcoin was the first big sign of trouble.
Now, FTX, one of the giants of the nascent crypto industry, is starting to sink beneath the waves. Not only is this bad news for investors, but it also changes the calculus for what was supposed to be a bright future for crypto-based payments. What really happened at FTX, and what does it mean for the future of cryptocurrency payments?
- What is FTX?
- What Happened to FTX?
- What Does the Collapse of FTX Mean for Crypto Payments?
- Conclusion
After peaking at a value of $65,000 per coin in 2021, Bitcoin—the first of the major cryptocurrencies and bellwether for the industry as a whole—has been spending most of this year trying to get back up over $20,000. At the time of this writing, it still has a ways to go.
With crypto’s status as a can’t-lose investment vehicle in doubt, many of the companies formed to facilitate crypto trading have been struggling—but FTX is a special case.
Founded by 30-year-old entrepreneur Sam Bankman-Fried, FTX was one of the largest cryptocurrency exchange companies in the world for a time. Buoyed by high-profile ad campaigns and the philanthropic activism of its founder, FTX was touted as the future of finance. But now, Bankman-Fried has resigned as CEO, FTX is in bankruptcy court, and enthusiasm for a blockchain-based future economy is starting to fade.
While the impact of crypto’s price drop is hitting speculative investors the hardest, there are implications for merchants and consumers as well. Crypto was being positioned as a low-cost, high-tech payment method that could supplant credit cards as the go-to solution for digital payments, especially in the Metaverse and other virtual spaces. While technology will march onward regardless of the fate of individual companies or currencies, there’s no denying that the fall of FTX could spell trouble in the near term for crypto payments.
What is FTX?
FTX is a cryptocurrency exchange based in the Bahamas. Founded in 2019, FTX has quickly gone from a leader in the crypto industry to a financial and legal catastrophe.
FTX, which stands for “Futures Exchange,” spun out of Alameda Research, a trading firm founded by Bankman-Fried and several partners. After a couple of years of raising capital and buying out smaller firms, FTX was valued at a possible $40 billion and enticed customers with Super Bowl ads featuring comedian Larry David as a cranky crypto skeptic.
As many observers have noted, investors would have been better off listening to Mr. David. In November 2022, disturbing reports about FTX’s finances started to hit the media. Things only got worse from there.
What Happened to FTX?
FTX’s fall from grace began when CoinDesk published a balance sheet from Alameda Research showing that they held a great deal of FTT, FTX’s in-house crypto token. This prompted rival exchange Binance to sell off their FTT holdings, leading to a liquidity crisis for FTX.
Binance’s decision to sell off FTT led to a drop in the token’s trading price and prompted many other investors to pull their funds out of FTX.
This effectively became an old-fashioned bank run, in which FTX ran out of cash to cover its customers’ withdrawals. Before long, FTX put a freeze on withdrawals.
In the days that followed, the extent of FTX’s entanglements with Alameda Research and other companies owned by Bankman-Fried were revealed, along with the fact that FTX was now $8 billion in debt. Bankman-Fried resigned as CEO and was replaced by insolvency specialist John J. Ray III, who had previously overseen the dissolution of Enron. As more problems came to light, FTX ended up in bankruptcy court, with aftershocks and collateral damage spreading far and wide across the cryptocurrency industry.
What Does the Collapse of FTX Mean for Crypto Payments?
Crypto, already losing investor and consumer confidence due to an ongoing decline in trading value, started looking even more volatile and risky after the FTX debacle. Companies that were previously enthusiastic about launching crypto payment platforms may have begun to rethink their plans.
While many observers have laid the blame for FTX’s collapse squarely upon Bankman-Fried, others have pointed out that none of this could have happened if crypto exchanges were regulated in the same manner as traditional banks.
For many early adopters of crypto, a big part of the appeal was the fact that it could be transacted peer-to-peer, without the involvement of big financial institutions. But as crypto became more popular, exchanges like FTX started to pop up to capitalize on consumer demand for easy trading, effectively becoming big financial institutions in their own right—but with none of the insurance requirements or regulatory controls.
Many industry analysts believe that crypto is still the future of digital commerce, but that it will be in the form of stablecoins or Central Bank Digital Currencies (CBDC)—coins that hold a fixed value, designed to be spent rather than held as investments.
By tying the value of crypto tokens like these to a fiat currency, consumers can hold and spend them without fear that they’ll suddenly wake up one day to find the coins in their digital wallet are worth pennies on the dollar—or that they’ve quadrupled in value the day after they were used to buy pet food.
Conclusion
FTX is a cautionary tale we’ve seen before: a new industry that is growing faster than regulators can keep up with it, a brash founder with more charisma than experience, and demand driven more by hype than by actual need.
The warning signs may be obvious after the fact, but it’s all too easy to get caught up in the moment when something new and exciting bursts onto the scene.
It’s good news for merchants that the future of everyday crypto payments is starting to seem less outwardly exciting. The CBDC currently being tested as a prototype by the Federal Reserve might not inspire hoarding and viral memes, but it could provide consumers with a secure, accessible, and low-cost way to make digital payments.
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