What the FTX collapse means for the cryptocurrency market

The rapid fall of FTX makes clear that better regulation is necessary to protect investors and reduce crime in the cryptocurrency market. Wharton’s Kevin Werbach explains why the path to regulation isn’t a straight line.

When FTX founder Sam Bankman-Fried testified before a U.S. Senate committee in February—months before his cryptocurrency exchange collapsed under the weight of his own financial misdeeds—Wharton legal studies and business ethics professor Kevin Werbach was also there.

A hand holding a smartphone with a cryptocurrency app open.

Answering policymakers’ questions about the risks faced by consumers in the cryptocurrency market, Werbach advocated for better regulatory frameworks and more funding for enforcement to fight crime in the digital space. Bankman-Fried also endorsed the idea of more oversight, although his comments to the committee now seem hypocritical. Once valued at $32 billion, FTX has filed for bankruptcy after a run on deposits exposed a deep hole in the balance sheet, and Bankman-Fried has resigned amid accusations of fraud. A U.S. House committee hearing is scheduled for December.

“It’s pretty shocking what has come out over the past several days with the collapse of FTX, and I’m sure there’s a lot more yet to come,” Werbach says. “In terms of business ethics, this is an easy one: Don’t commit fraud, don’t steal your customer’s money, and don’t use it for all sorts of personal ventures.”

Werbach says the incident raises larger questions about what is happening on cryptocurrency exchanges and how they should be regulated to protect investors. Congress has been examining the issues for several years and some bills are pending, but the FTX case is likely to “light a fire” under policymakers to create a more formal and extensive regulatory structure, he says.

The rapid dissolution of FTX made headlines, but the company is not the only exchange to be accused of fleecing investors. Because there are so many opaque actors in the digital assets space, “we don’t know the extent of the contagion. We don’t really know who basically has a hole in their balance sheet that they’ve been covering because of FTX or because of the earlier blowups,” Werbach says. noting the previous collapses of Celsius, Three Arrows Capital, and Terra Luna.

“I’m worried that there is a lot more yet to come,” he says.

Read more at Knowledge at Wharton.