The implosion of the exchange FTX shows how an industry built in the wake of the 2008 financial crisis has drifted far from its original ideals.
Not long after several Wall Street banks collapsed in 2008, a nine-page document circulated on an obscure mailing list, proposing a new kind of financial system that wouldn’t rely on any “trusted third party.”
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The paper was the basis for what became the cryptocurrency industry. Using sweeping, idealistic language, its adherents vowed to conduct business in a transparent and egalitarian way, rejecting the high-risk practices of a small number of powerful financial firms that caused the Great Recession.
But last month, the actions of a single crypto firm — the $32 billion exchange FTX — plunged the emerging industry into its own version of a 2008-style crisis. Once considered a safe marketplace for people to trade virtual currencies, FTX filed for bankruptcy after the crypto equivalent of a bank run, forcing industry executives, investors and enthusiasts to grapple with how a technology meant to correct the shortcomings of traditional finance ended up replicating them.
Executives who just a year ago were reveling amid crypto’s seemingly unstoppable growth are now scrambling to prove that they can learn from the mistakes and recapture the industry’s early ideals. Binance, the world’s largest exchange, announced last month that it would release more information about its finances and recruit independent auditors to review those disclosures. Coinbase, the biggest U.S. crypto exchange, proclaimed that it was committed to a “decentralized system where you don’t have to trust us.”
Many crypto advocates are pushing for more drastic reforms, urging investors not to store their digital holdings with big companies and instead turn to more experimental platforms run solely by code.
But for all the promises of change, FTX’s collapse shows how far crypto remains from fulfilling its original aims and gaining widespread acceptance. Consumer distrust has mounted this year amid major financial losses, criminal investigations and an increasingly skeptical regulatory climate in Washington. At a conference last month, Changpeng Zhao, Binance’s chief executive, said that FTX’s implosion would set the industry back by years.
