As Sam Bankman-Fried goes on trial, many digital asset players remain in survival mode.
Sara Feenan left her career in finance in 2017 to dive into the brave new world of cryptocurrency.
Feenan, who has worked at blockchain technology companies and exchange Binance over the years, is so excited to be part of a movement that promises to reshape and improve everything that she even named her dog after the inventor of Bitcoin.
But then came the turmoil of 2022, culminating in the spectacular collapse of the FTX exchange in November. In the months that followed, as the fallout spread, Feenan found herself out of work, her last job at a startup, and she left the world of cryptocurrency behind.
“I’m a little disappointed,” said Feenan, who now works at a non-crypto fintech startup in London. “Things like FTX are a little irritating. If you tell people you work in crypto and this just happened, it’s hard to prove to the outside world that not everyone in crypto is a scam.”
While this cloud of suspicion has hung over the asset class since its inception, it has perhaps never been as heavy as it has been in the months since the downfall of FTX and its mysterious leader, Sam Bankman-Freed. The cloud is unlikely to dissipate anytime soon as Bankman-Freed, who has pleaded not guilty to a host of charges against him, is on trial in one of the largest financial frauds in U.S. history.
Of course, nothing drives sentiment more than price. While Bitcoin has rebounded about 60% this year, trading around $27,000, it remains well below its record of $69,000 set in November 2021 and has been stuck in a trading range for much of this year. What was once a nearly $3 trillion market is now worth about $1 trillion. The goal of Bitcoin or any other cryptocurrency as a true alternative currency still seems to be just a dream.
On top of that, trading has dried up. The once-hot NFT market now looks like the "digital tulip mania" that critics always talk about. Researchers at crypto gambling company dappGambl said that of the more than 73,000 NFT collections, about 95% are essentially worthless. Citing data from blockchain company Block, the researchers further pointed out that the weekly trading volume of NFTs in July (this year) was about $80 million, just 3% of the peak in August 2021. Remember the much-hyped Dapper Labs NFT project NBA Top Shot? The project turned basketball highlights into tradable tokens, some of which sold for more than $200,000 in 2021. But now there are hundreds of NFTs for sale, with an asking price of just $1.
What's more, the once-loose money in the venture capital community has now tightened significantly. As of September 19, total venture capital deals for cryptocurrency and blockchain projects this year have shrunk to $7.3 billion, about a quarter of the total deals for all of 2021 and 2022, according to financial firm Pitchbook. At the same time, jobs in the industry are disappearing. While the cryptocurrency workforce grew by more than 18% in early 2022, employment has been falling throughout the year, with the most recent drop exceeding 5%, according to data from workforce intelligence firm Revelio Labs based on 35 large companies.
"Honestly, it's a bad situation," said Nico Cordeiro, chief investment officer at crypto hedge fund Strix Leviathan. "Revenue is minimal just because of the market conditions. You're not bringing in new investors because no one is investing in this space. Cryptocurrency players are in a survival mode right now: just keep operating as long as capital starts to return to the space."
Strix Leviathan had used FTX’s offshore exchange to trade some perpetual cryptocurrency futures that were not available on U.S. exchanges, but the company currently still has funds locked up in the bankrupt exchange through a major broker. It has since stopped trading perpetual futures due to concerns that there is no safe place to trade perpetual futures, and FTX’s main competitor Binance has itself come under increasing regulatory scrutiny.
For those who have been able to successfully launch crypto-related businesses in the post-FTX era, it’s been a tough road. In January, Hilal Diab launched his company Market Mapper, a blockchain analytics platform for traders in Tel Aviv. But he soon ran into trouble finding a major online advertising platform that would take over his business. Diab said that when he tried to sign up with Mailchimp to distribute Market Mapper’s newsletter, the company told them to look for another service provider because it didn’t want anything to do with the cryptocurrency industry. Even his friends and family were wary.
“As soon as I tell someone that my startup is related to crypto, they clench their fists. That’s my first reaction,” Diab said. “There are also investors who are skeptical about giving us money, especially after the FTX debacle. They’re afraid of lawsuits.”
These lawsuits and various other cases have piled up following the collapse of FTX and the crypto crash last year. In addition to FTX’s own bankruptcy and Bankman-Fried’s upcoming criminal trial, cryptocurrency companies Genesis Global, Celsius Network, Voyager Digital, Three Arrows Capital, and BlockFi Inc. have all been embroiled in bankruptcy and related legal proceedings. On September 29, Three Arrows Capital co-founder Su Zhu was detained in Singapore and faces potential jail time along with co-founder Kyle Davies for failing to cooperate with liquidators’ investigations into the defunct hedge fund.
Meanwhile, Coinbase Global Inc. is battling the U.S. Securities and Exchange Commission over allegations that many cryptocurrencies traded on its exchange are unregistered securities, while lobbying Congress and expanding overseas.
Binance has also been caught up in enforcement actions by the U.S. Commodity Futures Trading Commission and the SEC. Even Bankman-Fried’s parents have been dragged into litigation aimed at recovering funds they received from FTX.
But surprisingly, Georgetown University finance professor Reena Aggarwal said the courts are a rare source of optimism that could help cryptocurrency prices find a floor. She cited an appeals court ruling last month that overturned the SEC's decision to block Grayscale Investment LLC's proposed spot bitcoin exchange-traded fund. Aggarwal also cited another judge's ruling that Ripple Labs' XRP tokens were not securities when sold to the public.
“The SEC has been trying to enforce that and saying crypto is the ‘Wild West’ and we need to regulate. But the courts have said no,” Aggarwal said. “In a sense, this has given the industry new life.”
Brian Mosoff, CEO of Toronto-based investment cryptocurrency and blockchain project Ether Capital Corp., said many in the industry will be watching the SBF trial closely to see if any new details are revealed. But for Mosoff, the challenges facing the industry in the post-FTX era could also mark an important turning point.
“The silver lining here is that it just drives the conversation in every jurisdiction around the world because everyone realizes that this industry is not going away,” Mosoff said. “You can imagine a pre-FTX digital asset industry followed by a post-FTX digital asset industry. I think this could go down in history as a marker of institutionalization, trustworthiness, and regulation of the industry.”
Indeed, with BlackRock Inc., Fidelity, Franklin Templeton and others hoping their bitcoin spot exchange-traded funds (ETFs) will eventually be approved, and traditional Wall Street firms busy with blockchain projects that transform traditional assets into digital tokens, it can be said that the future of cryptocurrency innovation has never been more institutionalized.
As for Feenan, the London-based crypto exile who named her dog Toshi after Bitcoin’s mysterious inventor, Satoshi Nakamoto, she’s not ready to give up on the digital asset industry for good.
“Crypto can go from esoteric to really silly very quickly,” Feenan said. “If something interesting comes up or I think the project will help move development forward, I’ll come back.”
— Original author with assistance from Stephanie Davidson and Jody Megson