By Alma Angotti, Jonathan Shiery
The crypto community watched a media maelstrom closely as FTX Trading collapsed over a two-week period in November 2022 and filed for Chapter 11 bankruptcy protection. On December 13, the US Securities and Exchange Commission (SEC) charged Sam Bankman-Fried—the founder of FTX—with fraud for a scheme that defrauded investors for years1. Allegedly, the FTX founder diverted FTX customer assets to a hedge fund for which he held majority control—Alameda Research (something he hid from FTX equity investors). Alameda Research was provided special treatment on the FTX platform (including allowing the company to hold a negative balance in its FTX customer account—untethering it from any collateral requirements), giving it a virtually unlimited line of credit that was funded by FTX customers.
The FTX frenzy had several downstream impacts. One crypto lender lost $800 million2 in equity holdings through its exposure to FTX and filed for Chapter 11 bankruptcy in November. Another crypto lender paused withdrawals3 after FTX’s collapse, and other casualties were noted across the cryptocurrency industry. This domino effect highlighted the interconnectivity between crypto-lending platforms. There is no doubt that regulators, politicians, financial institutions, and consumers will attempt to bring lessons learned from FTX into the future. We are already seeing regulators such as the SEC warn investors4 to put little faith in crypto companies’ proof-of-reserves.
Despite the controversy, innovation in crypto products and services and global adoption are flourishing. Innovation in digital payments is allowing customers to easily open debit cards to pay for purchases using cryptocurrency and are allowing investors to easily trade crypto assets. US investor adoption is up year over year. The president of Fidelity Digital Assets remarked, “The increased adoption reflected in the data speaks to a strong first half of the year for the digital assets industry. While the markets have faced headwinds in recent months, we believe that digital assets fundamentals remain strong and that the institutionalization of the market over the past several years has positioned it to weather recent events.” In reality, the FTX collapse had little to do with crypto, and much to do with bad actors, and a lack of basic corporate governance and sound risk management.
In the eighth edition of the Two Worlds Colliding series, we explore regulatory activity, crypto adoption both domestically and globally, security concerns, and the potential future of digital finance.
We are seeing US regulators and politicians attempt to apply lessons learned from the FTX collapse and prevent potential future consumer harm.
Decentralized Finance (DeFi) hacks continue to grow in quantity and magnitude, with the 10 largest in 2022 resulting in over $2.5 billion stolen.
Google took its first step into the cryptocurrency industry through a strategic partnership with Coinbase, while other big-name financial services companies expanded their existing presence in crypto.
Google selects Coinbase to take cloud payments—with cryptocurrencies and will use its custody tool—On October 11, 2022, Google and Coinbase announced a partnership13 where Google will start allowing a subset of customers to pay for cloud services with digital currencies in early 2023. In addition, Google said it would explore using Coinbase Prime (a service for storing and trading cryptocurrencies) and Coinbase will move some of its applications to Google’s cloud from Amazon Web Services.
Mastercard to bring crypto-trading capabilities to banks—On October 17, 2022, Mastercard expanded its partnership with Paxos Trust Company, a leading regulated blockchain infrastructure platform, to introduce Crypto SourceTM, a new program to enable financial institutions to bring secure crypto-trading capabilities and services to their customers. The partnership aims for Paxos to provide crypto-asset trading and custody services on behalf of the banks14, while Mastercard will leverage its technology to integrate those capabilities into banks’ interfaces, resulting in a seamless experience for the consumer.
Mastercard and BitOasis sign strategic partnership across MENA to launch crypto-linked cards—On October 25, 2022, BitOasis, the leading cryptocurrency platform for the Middle East & North Africa (MENA), and Mastercard partnered to launch a series of crypto-card programs in the region that will facilitate day-to-day usage of cryptocurrencies at points of sale and across ecommerce platforms15. BitOasis customers will be able to convert their cryptocurrency holdings to fiat currency, allowing the consumer to easily shop and pay at more than 90 million merchant locations globally. The first BitOasis cards are expected to launch in early 2023.
PayPal Working With Crypto Wallet MetaMask to Offer Easy Way to Buy Crypto—On December 14, 2022, PayPal announced that it will integrate its buy, sell, and hold crypto services with MetaMask Wallet16 as the companies look to broaden users' options to transfer digital assets from their platforms.
A continued innovation and inception of digital asset products and services aims to familiarize consumers with daily use cases of cryptocurrency.
Blockchain.com partners with Visa to offer crypto debit card—On October 26, 2022, crypto exchange Blockchain.com partnered with Visa17 to launch a crypto card, available only to US residents, which allows users to pay using their crypto or cash balance wherever Visa debit cards are accepted. Blockchain.com revealed that there would be no sign-up or annual fees, no transaction fees and, users would earn 1% of all purchases back in crypto.
Fintech company ZELF launches anonymous Visa debit card with crypto recharge—On December 8, 2022, American fintech company ZELF introduced an anonymous18 Visa debit card that can be used at any of Visa’s locations worldwide. ZELF’s latest initiative will allow users to open a USD checking account with only their name, email, and phone number, sparing them from having to provide documentation such as a Social Security number and proof of address. Holders of the Visa debit card will have the option of funding their accounts through traditional electronic payments, money and wire transfers, or crypto payments.
Binance.US finally rolls out mobile payments service to US customers—On December 14, 2022, Binance.US rolled out a feature called "Pay"19 that was launched by its global parent (Binance) to users outside the US in 2021. The service, which includes peer-to-peer payments and merchant transactions, allows mobile users of the Binance app to instantly transact with nearly 150 supported cryptocurrencies (without fees).
Hong Kong's New Bitcoin and Ethereum Futures ETFs Raise $79 Million in Trading Debut—On December 15, 2022, CSOP Asset Management listed Asia’s first Bitcoin and Ethereum future ETFs20. The products offer the region a regulated environment for access to these contracts, as Hong Kong continues its plan to become a top Asian crypto hub by offering legalized retail trading and digital-asset ETFs.
Progress on Central Bank Digital Currencies (CBDCs) and digital currencies continues. However, speculatory eyes are placed on private crypto companies.
Despite heated newscasting over the past quarter, decentralized exchange volumes25 are up by almost 70% and surveys show a continued interest by the American population in crypto.
As the chart below shows, there were many momentous and notable events that took place in the crypto world in 2022, including the Ethereum merge and downfall of major companies such as FTX. The market responded29 to these events—market cap of crypto dropped from roughly $2 trillion at the beginning of the year to less than $1 trillion by the end of the year.
However, the crypto community at large is also responding to an astounding amount of innovation and increase in crypto adoption. The number of smart contracts30 deployed on the ETH networked surged from 1.4 million in Q1 2022 to 4.6 million in Q4 2022. An increase in the number of smart contracts deployed is a tell-tale sign that leveraging cryptocurrency, spreading global adoption, and continuing development of products and services remain a priority for private companies, investors, and consumers.
“In a year where bitcoin prices fell by 63%, a clear bear market precipitated by irrational exuberance and an overly hawkish Fed, it is encouraging to see investors on the whole still choosing to invest.”—James Butterfill, researcher at CoinShares.
“Concerns about the risks they pose to financial stability are therefore likely to come back to the fore sooner rather than later, as are public expectations that policymakers have in place a robust international framework to identify, monitor and address those risks.”—Klaas Knot, chair of the Financial Conduct Authority Board, says in a letter to the G20.