Early November, CZ posted a tweet. To everyone's surprise, his tweet became the fuse, detonating FTX, sending shocks of terrors in the encryption industry. The turbulent aftermath of FTX after the collapse resulted in the spread of contagion across various related firms and protocols.
At the pinnacle of FTX’s downfall, users with funds on the exchange platform were the first to be affected. According to data, FTX's market share in June 2022 is about 24%, ranking second in the industry, and its website visits were about 5.76 million times per week (including FTX US).
This large amount of website visits likely signified there were many active users and investors of the platform. By being unable to withdraw funds from the exchange, many were badly affected and their trust in the industry was also broken.
This contagion led to the massive panic and withdrawals from other centralized exchanges (CEX). Cryptocurrency balances on CEXs have fallen to their lowest levels since November 2018, data shows.
In just one week from November 6th to November 13th, more than $3.7 billion worth of Bitcoin, $2.5 billion worth of Ethereum, and more than $2 billion in stable coins were withdrawn from centralized exchanges.
The massive panic withdrawals from CEXs seems to be just the tip of the iceberg, and everyone will be affected by the resulting avalanche in the long run.
The "stampede effect" as a result of extreme panic withdrawals, saw a huge selloff in mainstream currencies such as Bitcoin and Ethereum, causing the market to plummet. In addition to investors selling, Bitcoin also encountered the largest single-day selling pressure from miners since January 2021.
According to the data, in November 2022, the average hash price of Bitcoin will reach $0.05. Bitcoin's current price of $16,500 makes mining unprofitable not only for small miners, but also for large miners, while Bitcoin miners and hedge funds who used loans to overleverage at the same time could face "bankruptcy" crisis.
Compared with market turmoil, the encryption market is facing more stringent scrutiny from countries all over the world.
Market turmoil can be eased over time for the industry, but it is difficult for various countries to change their attitudes towards the encryption market in a short period of time.
The encryption market, which was already difficult to be accepted by governments, has encountered a "policy winter."
United States - Legislative regulation is imminent
Compared with other countries, the United States has more stringent requirements for operation of cryptocurrency exchanges in the United States such as perfect margin mechanisms. Hence, the exchanges operating in the United States have a special "US" version, such as FTX US and Binance US, and slightly different from their global versions.
Now after the thunderstorm, the White House of the United States has further enforced its strict stance, stating: "It will continue to monitor the development of cryptocurrencies, and believes that cryptocurrencies may harm ordinary Americans without proper supervision."
The statement of the White House of the United States is undoubtedly a clear-cut expression of the attitude of the US government towards cryptocurrencies. After that, similar statements by various functional departments in the United States have surfaced.
Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), directly stated in an interview that "cryptocurrency is an obviously non-compliant field." He believes that by allowing exchanges to register under U.S. regulatory policies and implementing strong law enforcement, can there be full protection of investors.
U.S. Treasury Secretary Janet Yellen expressed this attitude by the U.S. government clearer than the chairman of the U.S. SEC. She said that "cryptocurrency regulation has always been the focus of the Biden administration. The U.S. government will be regulating the industry under President Biden’s executive order.”
It is hence evident that both the U.S. Treasury Secretary Yellen and the Biden administration have always been vigilant about cryptocurrencies. This FTX thunderstorm has increased the urgency for US regulation of cryptocurrencies. There are of course many reasons, but the most important thing is that as the cryptocurrency market continues to expand, more and more traditional financial institutions will join this field and become more interconnected with this industry.
This means if a black swan incident like the FTX collapse occurs again, it is likely to pose a larger threat to financial stability, which may result in an even wider and devastating impact across the country and the world.
This hence explains Yellen’s emphasis for "regulation", "strengthening supervision" and "strictly implementing supervision" everywhere and calling on Congress to step in to fill the regulatory gap.
U.S. Treasury Secretary Yellen was not the only one who was concerned about the impact of the encryption market on traditional finance. Michael Barkin, the vice chairman of the Federal Reserve Supervision, also made relevant statements about FTX such as the need for proper protective measures for banks working in the crypto industry.
In addition, Federal Reserve Vice Chairman Brainard also expressed his views. He believes that "the encryption industry is highly centralized and interconnected, rather than decentralized, and cryptocurrencies need to be subjected to regulatory licenses."
Judging from the voices of various representatives of the Federal Reserve, the Federal Reserve’s is adamant that cryptocurrencies should not affect the stability of the traditional financial system.
So, when will the U.S. regulatory policy on cryptocurrencies be announced? There is no doubt that FTX has become the biggest driving force for the implementation of U.S. policy regulation. Rostin Behnam, chairman of the U.S. Commodity Futures Trading Commission (CFTC), even publicly stated that this crisis is "enough to push Congress to act."
However, judging from the current market information, the regulatory policy on stable coins should be the first to be implemented, because US legislators generally believe that stable coins may be a regulatory field that they can initially deal with. For example, US Senator said that he hopes to promote the hearing of the Stable coin regulatory bill jointly submitted by him and Senators Patrick Toomey and Cynthia Lummis in the next few weeks.
South Korea - Multiple-pronged approach
South Korea is the country with the largest proportion of people participating in cryptocurrency in the world. The incident of Three Arrows Capital (3AC) has had a profound impact on South Koreans. Similarly, according to statistical data, South Korea accounted for more than 6% of the total FTX users, the highest for any country. Roughly calculated, the number of Korean users affected by FTX this time may exceed that of the 3AC collapse.
After the FTX incident, the Financial Intelligence Unit (FIU) under the Korean Financial Services Commission immediately conducted a risk investigation on 40 virtual asset providers in South Korea to prevent a second FTX incident.
Concurrent with the risk investigation, Korea’s regulator, the Financial Supervisory Service (FSS), immediately held talks with the Korea Accounting Standards Institute and the Korea Institute of Certified Public Accountants (KICPA) to draft initiatives to introduce audit guidelines for cryptocurrency-related companies. The new guidelines drafted this time will force exchange-related companies to disclose more detailed platform currency data and reserves held.
Simultaneously, there is also the introduction of South Korea's Digital Assets Basic Act. Originally, this act required a longer period of review and preparation, but due to the FTX incident, the bill was brought forward and is expected to be completed next year. Kim So-young, vice-chairman of South Korea's Financial Services Commission (FSC), said that given the urgency to protect users, it would be better to set minimum necessary regulatory standards and supplement them, rather than wait for international standards.
The Digital Assets Basic Act will consist of 13 crypto legislative proposals currently before the National Assembly. The bill is mainly to ensure that virtual asset service providers fulfill their obligations to protect user assets and prohibit service providers from issuing tokens.
In addition to this, South Korea’s ruling party is also reviewing a plan to amend the implementing decree of the Specified Financial Transaction Information Act so that crypto exchanges can separate their own assets (in their proof of reserves) from user deposits.
Japan - Minimal Impact due to Accelerated Regulation Measures
Since Japan has relatively stricter policy supervision on cryptocurrencies, after FTX collapsed, the Japanese financial regulator found that the impact on the country was minimal. Due to the heavy regulations on local digital asset exchanges, Japan's relevant institutions and people have not suffered too much loss.
But this does not mean that Japan was sitting idle. Haruhiko Kuroda, Governor of the Bank of Japan, stated in an interview on the topic of FTX, that he will quickly take regulatory measures to deal with the risks of encrypted assets.
Europe - Regulation remains a theme
Compared with other countries who were ramping up regulation efforts towards cryptocurrencies, Europe was relatively calmer. The vice president of the European Central Bank, Guindos, believed: “Fundamentals of cryptocurrencies have been pretty weak and (the market) shouldn't be surprised by the recent cryptocurrency crash, whose wider impact looks limited."
Calmness does not mean that Europe has relaxed its vigilance towards the encryption market. European Central Bank Governing Council Villeroy said in response to the FTX incident that he hoped this would be a catalyst for international regulation. Leaders from FSB Europe also said there was an urgent need to regulate "crypto conglomerates and exchanges that vertically integrate multiple functions."
Other Countries – Expressed and Announced Potential Regulation
The Australian government recently announced the establishment of a strong regulatory framework for cryptocurrencies, and their Ministry of Finance expects to formulate rules to strengthen investors next year. In addition, countries such as Argentina and Turkey also expressed their intentions to regulate the encryption market.
Conclusion
Up to now, more countries around the world have gradually unified their attitudes towards regulating the encryption market. In 2023, the encryption market may usher in its first year of regulation. This will gradually reduce the gray areas of the industry, and the industry will enter a stage of accelerated reshuffle. The next test will be towards all protocols building in Web3, to accept regulation or champion decentralization and die.
YouQuan
Alex
Kikyo