The collapse of cryptocurrency exchange FTX wiped out the cryptocurrency assets of millions of customers, and its billionaire founder Sam Bankman-Fried, who is now facing criminal fraud charges in New York, has seen his standing plumped.
However, the fall of Bankman-Fried and the Bahamas-based exchange has not fundamentally changed the way cryptocurrencies operate or are regulated. The sector remains the Wild West of finance. At its peak, FTX held more than $10bn in customer deposits.
Terrorists and money launderers use cryptocurrencies to cover their tracks. Hackers often find ways to steal digital currency. Global cryptocurrency trading is still concentrated on the giant offshore exchange Binance, which has been accused of some of the same risky practices as FTX.
While the collapse of FTX roiled the coin community, it did not change the legal and regulatory landscape. Unlike previous crises that prompted U.S. lawmakers to take action, lawmakers are divided over how, or even whether, to regulate the cryptocurrency market.
Regulators have taken piecemeal enforcement actions to impose Wall Street rules on the cryptocurrency industry, and large cryptocurrency exchanges like Binance are fighting this in court.
As a result, there could be the next FTX and investors could be losers again.
John Reed Stark, a former enforcement official at the Securities and Exchange Commission, said it's certainly possible it could happen again because there's nothing to stop it.
To be sure, part of the challenge of regulating the cryptocurrency industry stems from the global nature of the industry. These large cryptocurrency exchanges are located outside the United States, but Americans can still find ways to trade on them. According to the regulatory lawsuit, although Binance is not qualified to serve traders in the United States, nearly 20 percent of Binance's customers in 2020 are based in the United States.
Both FTX and Binance started out in Asia and have traveled to multiple countries to avoid regulatory clampdown. FTX eventually settled in the Bahamas, where cryptocurrencies are legal, and where they are not effectively regulated. Binance claims it has no headquarters.
Another possible reason why FTX has not attracted more regulatory action? Despite all the hype around cryptocurrencies, their global market capitalization is only about $1 trillion, which is still small compared to mainstream markets and the financial system. So while individual investors are often at risk, the bitcoin industry has not posed a systemic danger to date.
While bitcoin prices have risen since last year, venture capitalists have scaled back their support since the FTX bankruptcy. The U.S. banking sector does not provide financial support for cryptocurrencies, which limits consumer exposure to cryptocurrencies and the ripple effect of the cryptocurrency market turmoil.
Still, the potential risks for retail investors are part of the reason the SEC is trying to rein in the industry. SEC Chairman Gary Gensler said in an interview that something like the FTX crash could happen again because the underlying business model of cryptocurrencies is riddled with conflicts of interest.
Gensler said the system is highly interconnected, highly centralized, highly leveraged and has irregularities that leave more investors vulnerable in the future.
FTX was forced to file for bankruptcy after users learned that some of their funds had been misused and rushed to withdraw cryptocurrencies from the exchange's digital vaults. The run revealed billions of dollars in gaps, and it was discovered that Mr Bankman-fried's hedge fund, Alameda Research, had siphered billions of FTX clients' money for other investments.
Some of Bankman-Fried's former top lieutenants testified against him in court last week. He has been charged with wire fraud, conspiracy to commit securities fraud, money laundering and other violations.
The red flags that led to FTX's demise persist on other exchanges. Like FTX, Binance has affiliated trading firms that trade with customers on the platform, including on Binance's U.S. portal, Binance.us, according to the SEC's complaint against Binance.
FTX isn't the only big ship to sink in 2022. Many of the cryptocurrency lending firms that once thrived quickly imploded when borrowers defaulted on their loans or were dragged down by their ties to the FTX.
Binance also stores its customers' assets, which, according to the SEC, it holds in an account controlled by Binance's affiliated trading company.
On Wall Street, brokerage firms that protect investors' assets must follow rules that separate investors' assets from the firm's own.
Binance said it should not be confused with FTX. Binance said in a statement that the assets of all users of the exchange are accounted for and the company can meet withdrawal requirements. Binance also claims that it does not have any debt and owns various types of trading companies that support round-the-clock trading.
The SEC and other U.S. regulators have filed lawsuits asking U.S. courts to impose federal investor protections on Binance and Coinbase, the No. 1 cryptocurrency exchange in the United States.
The companies are fighting the lawsuits in court, arguing that the SEC has no jurisdiction over their activities.
But litigation has been slow to force market change. Another problem: The SEC could lose the case. The SEC has so far had a good record in cryptocurrency-related lawsuits, but a federal judge in the United States in July dismissed some of the agency's claims against large cryptocurrency XRP tokens.
Congress, meanwhile, is divided over what to do. Republicans are leaning toward legislation that would specifically set rules for cryptocurrencies. But top Democrats are content to let the SEC and other regulators manage the cryptocurrency system, said Ian Katz, a policy analyst at Capital Alpha Partners.
"If they really feel that more small and medium-sized businesses in the real economy are going to get hurt, there will be more incentive to do something," Katz said.
Market participants who believe FTX will not happen again say that the investment environment is different today and that cryptocurrencies have improved their practices. FTX flourished during the years when the price of bitcoin and other assets climbed, allowing small traders to take advantage of contracts to gain 100-to-1 returns whenever the price rose.
They also said that U.S. investors are more reliant on U.S. exchanges such as Coinbase and Kraken, which have much better risk management practices and compliance teams than FTX.
"What FTX has done is incredibly disruptive to the industry," said Kristin Smith, CEO of the Blockchain Association. The Association is an organization that lobbies for cryptocurrencies in the United States. "No good actor in this space wants to see that happen again," Smith said.