The recent collapse of crypto exchange FTX has sent shockwaves through the defi space, with a potential spillover into traditional finance still possible. It could take months or even years to finally assess the full impact of this collapse. Presently, still more dominoes are likely to fall as de-levering occurs throughout the industry. FTX, its subsidiaries and partners, including Sam Bankman-Fried’s trading firm Alameda Research, are a complex puzzle that will take liquidators years to solve and will almost certainly take out other major players in the defi/crypto space. While uncertainty remains high, three trends will persist as this unfolds.

REGULATION IS COMING

Regulation in the crypto space has always been contentious. The concept of regulation in some ways stands directly in contrast to the decentralized aspirations of crypto. FTX’s implosion brings regulations from a likely distant reality to a current necessity. The aftermath of the 2008 financial crisis led to the creation of the Volcker Rule, which banned proprietary trading. If such a rule had been in place for crypto, the FTX collapse likely could have been prevented. Information from recent bankruptcy filings showed the collapse of FTX has affected both retail traders and institutional firms. The impact was far reaching, with more than 1 million creditors total, and the 50 largest creditors owed over $3.1 billion. It is unclear how regulation and oversight will take place or its impact on the industry, but it is safe to say that regulation is now viewed as a necessity across constituencies, including policymakers, businesses, and even the crypto players themselves.

NO LONGER THE COOL KID ON THE BLOCK

Enron tainted energy trading, and FTX has taken the shine off the crypto space. NFTs, meme coins and the metaverse, are no longer the hot place to be. Instead, over the past six months, no other sector has suffered losses as immense as the crypto space. Even blue-chip coins have suffered tremendous losses, and some now face imminent collapse due to FTX. One example of this is Solana, a coin designed to be a better version of Ethereum, which has lost 51 percent of its value after FTX filed for bankruptcy. This is equivalent to a loss of more than $5 billion in market cap. Digital Currency Group, the parent of Grayscale, the first closed-end bitcoin fund to trade on a stock exchange, has been reported to be on unstable footing due to its exposure to FTX. Grayscale Bitcoin Trust is currently trading at a 40 percent discount to its intrinsic value. The cloud hanging over the industry will slow adoption by traditional financial services firms such as TD Bank and Fidelity. With FTX’s collapse, crypto is no longer seen as something that is the purview of technologists making money in a way that most of us don’t understand. Instead of the fear of missing out that has dominated crypto speculation over the past three years, the longstanding naysayers — such as Charlie Munger, Warren Buffet and Jamie Dimon — seem to have accurately prophesized of crypto’s recent stumble. The taint of the FTX collapse, and potential misconduct, means crypto will be seen with a stain that will slow adoption, particularly by those who are investing without understanding the principals of decentralized finance. It is highly likely that established brokers will operate with increased caution, especially with the risk of new regulations.

BLOCKCHAIN SURVIVES (BUT MIGHT NOT THRIVE)

Even if crypto enters an ice age, the technology of decentralized ledgers and blockchain has immense value. Now that it has been “invented” (or discovered?), it will continue to be a part of our lives and economy. Recent events have brought uncertainty regarding the timeline of the adoption of these crypto-related technologies. The mania behind converting everything from boarding passes to sports tickets into an NFT will slow. But the use of decentralized ledgers in industries such as art, music, and collectibles will continue to grow. The potential for the technology remains tremendous, especially as the cost of utilizing a decentralized ledger continues to fall. Blockchain technology could eliminate middlemen by providing a trusted network without a centralized ledger. This could impact a number of industries, including, for example, the music business. Record labels, Ticketmaster and Stubhub could all be rendered useless if the technology is successfully implemented — increasing streaming revenues for artists, reducing fees for fans, and allowing artists to track who is going to their performances.

CONCLUSION

The current market cap of all cryptocurrencies is more than $850 billion, with a trading volume of about $50 billion every 24 hours and more than 300 million people participating globally.

Is FTX the Lehman Brothers of the industry? Time will tell. Perhaps Enron is a better comparison, as that collapse led many to shun terms like “asset light” just as today “crypto” is being dismissed. The horizon is unclear and the storm of FTX will take some time to settle. The long-term consequences of the FTX collapse will take years to play out.

Amid the chop, three things are clear: regulation is coming sooner and more aggressively than before the FTX implosion, adoption of cryptocurrencies and other digital assets will slow as the halo of crypto dissipates, and blockchain will persist as an innovative way to transact.

Mark Bell is part of the multifamily office and private capital group at Balentine, an RIA with offices in Atlanta and Raleigh. Michael Jin is a dual enrolled senior at Emory University and Georgia Tech, studying finance and mechanical engineering. His interests are in real estate and other forms of alternative investments.