As Sam Bankman-Fried faces trial, many players in the digital asset space are still in survival mode.
Sara Feenan gave up her career in finance in 2017 to immerse herself in the exciting new world of cryptocurrencies.
Over the years, Feenan has worked for blockchain technology companies and Binance exchange. She was thrilled to be a part of this movement that holds hope to reshape and improve everything, even naming her dog after the inventor of Bitcoin.
But then came the turmoil of 2022, with the shocking collapse of FTX exchange in November as the climax. In the following months, as the impact spread, Feenan found herself unemployed, with her most recent job being at a startup. She eventually left the cryptocurrency world.
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“I was a bit disappointed,” Feenan said. She now works at a non-crypto fintech startup in London. “Things like FTX make it frustrating. It’s hard to prove to the outside world that not everyone in the crypto industry is involved in fraud when something like this just happened.”
While this cloud of suspicion has hung over this asset class from the beginning, it has arguably never been as heavy as in the months following the downfall of FTX and its enigmatic leader Sam Bankman-Fried. With Bankman-Fried currently facing trial for one of the largest financial fraud cases in US history, the cloud is unlikely to dissipate anytime soon. Bankman-Fried has pleaded not guilty to a series of charges against him.
Of course, nothing affects market sentiment more than price. Despite a rebound of around 60% for Bitcoin this year, trading at around $27,000, it remains far below the record of $69,000 set in November 2021 and has spent most of this year stuck in a range. What was once a nearly $3 trillion market is now valued at around $1 trillion. The goal of Bitcoin or any other cryptocurrency becoming a true alternative currency still seems like a dream.
Furthermore, trading has also dried up. The once hot NFT market now looks like what critics would call a “digital tulip mania.” Researchers from the crypto gambling company dappGambl stated that around 95% of over 73,000 NFT collections are essentially worthless. They further pointed out, citing data from blockchain company Block, that the weekly trading volume of NFTs in July was around $80 million, only 3% of the peak in August 2021. Remember the heavily promoted Dapper Labs NFT project NBA Top Shot? The project turned basketball highlights into tradable tokens, with some NFTs selling for over $200,000 in 2021. But now, there are hundreds of NFTs for sale with a price tag as low as $1.
More importantly, the funding in the venture capital industry has significantly tightened. According to data from financial firm Pitchbook, as of September 19th, the total amount of venture capital transactions for cryptocurrency and blockchain projects this year has been reduced to $7.3 billion, approximately one-fourth of the total transactions for the whole year of 2021 and 2022. At the same time, job positions in this industry are disappearing. Based on data from labor intelligence company Revelio Labs, although the growth rate of cryptocurrency labor force exceeded 18% at the beginning of 2022, the employment rate has been declining throughout the year, with the recent decline exceeding 5%.
“To be honest, the situation is very bad,” said Nico Cordeiro, Chief Investment Officer of cryptocurrency hedge fund Strix Leviathan. “Income is already minimal just because of the market conditions. You won’t attract new investors because no one is investing in this field. Players in the cryptocurrency field are currently in survival mode: as long as capital starts returning to this field, they will continue to operate.”
Strix Leviathan used to trade some perpetual cryptocurrency futures that American exchanges couldn’t provide through FTX’s offshore exchange, but currently, the company still has funds locked in bankrupt exchanges through major brokers. Subsequently, due to concerns about the lack of secure venues for trading perpetual futures, FTX’s main competitor Binance itself has also faced increasingly strict regulatory scrutiny, and the company has stopped trading perpetual futures.
For those who can successfully start cryptocurrency-related businesses in the post-FTX era, it is a difficult path. In January of this year, Hilal Diab founded his company Market Mapper in Tel Aviv, which is a blockchain analytics platform for traders. However, he soon encountered difficulties in finding a major online advertising platform that could take over his business. Diab said that when he tried to sign a contract with Mailchimp to distribute Market Mapper’s newsletter, the company asked them to find another service provider because it didn’t want any association with the cryptocurrency industry. Even his friends and family are cautious.
“Once I tell someone that my startup is related to cryptocurrency, 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 collapse of FTX. They are afraid of lawsuits.”
After the collapse of FTX and the cryptocurrency crash last year, these lawsuits and various other cases have piled up. In addition to FTX’s own bankruptcy and the upcoming criminal case against Benjamin Fried, cryptocurrency companies Genesis Global, Celsius Network, Voyager Digital, Three Arrows Capital, and BlockFi Inc. have all been involved in bankruptcy and related legal proceedings. On September 29th, Su Zhu, co-founder of Three Arrows Capital, was detained in Singapore and faced potential imprisonment together with another co-founder Kyle Davies for failing to cooperate with the liquidators in the investigation of a dissolved hedge fund.
Meanwhile, Coinbase Global Inc. is battling with the U.S. Securities and Exchange Commission (SEC), which has accused the company of trading many cryptocurrencies on its exchange without registering them as securities, while also lobbying the U.S. Congress and expanding overseas.
Binance has also become embroiled in enforcement actions by the U.S. Commodity Futures Trading Commission and the SEC. Even the parents of Benkman-Fried have been caught up in a lawsuit aimed at recovering funds they received from FTX.
Surprisingly, George Washington University finance professor Reena Aggarwal said the courts are a rare source of optimism that could help find a bottom for cryptocurrency prices. She cited a ruling by an appeals court last month that overturned the SEC’s decision to block Grayscale Investment LLC’s proposed Bitcoin spot trading exchange-traded fund. Aggarwal also cited a ruling by another judge that Ripple Labs’ XRP token was not a security when sold to the public.
“The SEC has been trying to enforce and said cryptocurrencies are the ‘wild west’ and we need regulation. But the courts have said no,” Aggarwal said. “In a way, it has given this industry new life.”
Brian Mosoff, CEO of Toronto-based investment cryptocurrency and blockchain project Ether Capital Corp., said many in the industry are closely watching the SBF trial to see if any new details are revealed. But for Mosoff, the challenges facing the industry in the post-FTX era could also mark a significant turning point.
“The hope here on the front lines is that it just pushes the conversation in every jurisdiction globally, because everyone realizes this industry is not going away.” Mosoff also said, “You can imagine there will be a pre-FTX digital asset industry, and then a post-FTX digital asset industry. I think this could be a milestone for the industry becoming institutionalized, trusted, and regulated, and it will go down in history.”
In fact, companies such as BlackRock Inc., Fidelity, Franklin Templeton, and others are hoping for approval of their Bitcoin exchange-traded fund (ETF) spot trading platforms, while traditional Wall Street firms are busy transforming traditional assets into blockchain projects with digital tokens. It can be said that the future of cryptocurrency innovation has never been so institutionalized as it is now.
As for Feenan, the London-based cryptocurrency exile who named her dog Toshi after the mysterious inventor of Bitcoin, Satoshi Nakamoto, she is not yet ready to give up the digital asset industry forever.
“Cryptocurrencies can quickly go from being esoteric to being very stupid,” Feenan said. “If something interesting comes up, or if I think a project will help drive development, I will come back.”
– Original author completed with assistance from Stephanie Davidson and Jody Megson
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