The collapse of the cryptocurrency exchange FTX could trigger a surge of regulation of the industry, financial services executives and analysts predicted.

The prominent cryptocurrency exchange FTX went from a $32 billion valuation to bankruptcy within days, and its collapse has set off a wave of troubles for other companies across the crypto industry, including crypto exchange peer BlockFi. 

The crypto industry ignored “a lot of red flags” related to FTX because people thought it was “a very successful business,” Fireblocks Vice President Ran Goldi said in an interview last week. Now, “everyone moved to the other side, which is, ‘crypto is bad, we need to kill crypto,’” said Goldi, whose software company provides digital asset security services.

The FTX implosion crushed the momentum cryptocurrencies had in gaining broader acceptance in the banking and payments industries, said Goldi, who heads up payments for Fireblocks. He noted the industry had been moving ahead, spurring crypto frameworks and encouraging central bank digital currencies.

New York-based Fireblocks, which has raised $1 billion in venture capital and has about 600 employees, offers exchanges, banks, hedge funds, custodians and other entities software tools to securely issue, store and transfer digital assets. It also allows customers to expand their digital asset operations through Fireblocks’ network and wallet infrastructure. Some of the company’s approximately 1,700 customers include the payments companies Fidelity National Information Services’ (FIS) Worldpay and Checkout.com.

Fireblocks doesn’t hold funds or assets so it wasn’t directly affected by the FTX crash, but some of its clients were impacted, Goldi said. Because Fireblocks was integrated with FTX, some Fireblocks clients had assets at FTX and used Fireblocks to move them around the world, he explained. About two dozen Fireblocks clients experienced “a significant impact” from the debacle, he said. 

A concern for the crypto industry is that its path toward broader acceptance has been so volatile, Goldi said. Although more regulation of the industry is needed, he said, he fears now regulators will go too far and have an overly harsh response to digital assets as a result of FTX.

In another part of the payments world, Klarna CEO Sebastian Siemiatkowski, who leads the Swedish buy now-pay later provider, also expressed concern recently over the regulatory response to the FTX collapse, saying such regulation could affect fintech firms’ ability to compete with traditional lenders, Bloomberg reported. 

“Any proposed/enacted regulation is likely to be restrictive and/or expensive for exchanges, with the objective of preventing another FTX,” Bank of America analyst Jason Kupferberg wrote in a Nov. 18 note to investor clients regarding crypto platform Coinbase.

As the digital asset industry has grown, those within it have pressed for crypto-friendly regulation. FTX spent millions lobbying U.S. lawmakers, The New York Times reported. 

Although regulation is overdue, there is a risk that regulators will go after the most “egregiously, cartoonish forms of fraud and crime” and not address the more subtle but systemically riskier issues, Willamette University Law Professor Rohan Grey said in an interview.

While the Fireblocks business is stablecoin-based, meaning the digital assets are typically pegged to U.S. dollars, the company was still fielding a lot of client inquiries in the wake of FTX, Goldi said. “We had to do a lot of calls explaining what happened,” he said. That being said, “we don’t see any slowdown materially in sales or new accounts,” he added.

Although the FTX situation is likely to damage public perception of digital assets in the short term, “obviously, getting bad actors out is a good thing, and exposing systematic risk and learning from that is a good thing,” he said. In the long term, “regulations are a good thing,” as long as they’re within reason, he said.

By Caitlin Mullen on Dec 6, 2022
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