When FTX Group filed for Chapter 11 bankruptcy protection in a US federal court last month, a statement submitted to the judge by the cryptocurrency trading platform's new chief executive John Ray cited a “complete failure of corporate controls” and a “complete absence of trustworthy financial information”.
The road ahead will be hard and affect many, both directly and indirectly.
In its analysis of the 23-page bankruptcy filing, CNBC said the document indicates FTX has more than 100,000 creditors and its liabilities could be as much as $50 billion.
However, the full scope of the collapse will unlikely be known for many months, so those affected will also have to wait for some time to find out the extent of their exposure.
At Chainalysis, we extend our heartfelt sympathies to them. To that end, we are engaged with the bankruptcy case and are doing everything we can to help secure assets of the debtors.
While FTX founder Sam Bankman-Fried's business practices are under investigation following his arrest on December 12 in the Bahamas, I call on the cryptocurrency community to do two things.
First, have patience. The process is transparent and will yield answers.
The second is to draw an important distinction between any improprieties and the broader cryptocurrency industry, including the technology on which it is built.
All industries are operated by people. People make decisions on behalf of companies. And every industry has companies that abuse, fail and defraud.
I ask everyone to remember that whatever happened at FTX, it was not a cryptocurrency or blockchain-specific failure. It was, as many failures are, human.
The technology remains transformative — I firmly believe that cryptocurrency and the blockchain will be to the exchange of value what the internet has been for the exchange of information.
It is a cross-border, instantaneous and cheap way to transact value exchanges.
It enables the tokenisation of real-world assets — stablecoins have already done this for cash and it isn’t hard to imagine that cars, houses, securities and more will follow suit. With such potential, the demand for that is only going to increase.
What is required, then, is not an overhaul of the infrastructure and platforms that power the cryptocurrency world.
Instead, this moment is an opportunity to take stock of our values and advocate a better, safer ecosystem.
An inflection point
It is when times seem most bleak that monumental advancements in the cryptocurrency ecosystem take place.
The very movement itself was created out of the 2007-2008 global financial crisis, with the belief that the financial system should be better.
Watch: What is Bitcoin and how did it start?
Now, in the aftermath of FTX's bankruptcy filing and the continuing bear market, is when step changes in cryptocurrency are most likely to happen.
There is an opportunity — an imperative — for the industry to harness blockchains’ inherent transparency to build an economic system that holds itself to a higher standard.
As with any new technology, cryptocurrency has attracted criminals and fraudsters, but they are not representative of the industry.
Chainalysis researchers are continually astounded at the level of innovation in use cases.
Cryptocurrency payments give financial access to those who live far from cross-border remittance centres.
Digital assets serve as a store of value for countries suffering from hyperinflation. This year, we even saw the Ukrainian government raise money through cryptocurrency transactions for its war efforts and to help its people.
There have been stumbling blocks but the technology itself is inherently sound and offers simple solutions where existing financial systems fail.
It is an instantaneous, cost-effective, cross-border value-exchange system, the demand for which is poised to continue to increase.
With the dawn of Web3 technology, the use-case bubble for cryptocurrency will expand in countless ways we cannot yet imagine.
We will see cryptocurrency applications that overcome the illiquidity of traditional assets, eliminating middlemen and fostering more direct relationships between sellers and their customers.
At the end of this road of decentralisation of the business world, we will have enabled true community ownership.
Moreover, as the ecosystem matures, it is becoming increasingly difficult for malicious actors to operate.
We have already proven that using cryptocurrency to launder money is an easy way to get caught.
With the right data, tools, guidance and partnerships, the cryptocurrency industry can hold its businesses and people accountable to protect consumers by design.
Policy and prospects
In the near future, Chainalysis expects more discussions focused on consumer protection, including through custody, disclosure and market structure regulations, such as separating activities like custody and trading from operating under one roof.
Events such as FTX’s downfall are usually accelerants for such policymaking, where renewed efforts are initially focused on low-hanging fruit — strategic and effective action that can be acted upon quickly, making an important difference in the short to medium term.
Striking the appropriate balance between consumer protection and innovation will require close collaboration between the industry and policymakers across jurisdictions.
Chainalysis will continue to advocate regulatory frameworks that both protect consumers and empower innovators through providing access to data, expert analysis and tools that contribute to a better understanding of recent events and its continuing implications in the market.
Until the onset of such regulatory reforms, the cryptocurrency industry should take it upon itself to self-regulate.
If we remember the premium placed on trust by investors and customers, we can quickly see the incentive to work together towards standards of conduct.
These standards can include reporting on reserves and other disclosures.
Cryptocurrencies — in pictures
Yes, there is work to be done. But let us not forget that the end of FTX does not spell the end of the industry.
People made mistakes and it ended badly. But other people are demanding more and more cryptocurrency products and new models of ownership.
Cryptocurrency is just getting started. The industry is famous for its booms and busts along an underlying steady adoption curve.
Our current moment is simply another opportunity to emerge stronger. If we get it right with regulation, we can lessen the sector's volatility and usher in a phase of stability.
Longevity comes next.
Michael Gronager is the co-founder and chief executive of blockchain data platform Chainalysis