The demise of FTX (and the arrest of its founder Sam Bankman-Fried/SBF) was the last act in a year typified by crypto melodrama. 2022 was brutal on this most volatile of assets; Bitcoin dropped nearly 70 per cent; popular “stablecoin” Lunar imploded; and values spiralled downwards.

But it was FTX’s collapse that led the news in the closing months of 2022, and for good reason. At its height it was one of the most popular crypto exchanges in the world.

SBF, an ersatz techno folk hero and self-proclaimed “effective altruist”, drew supermodels (Gisele Bündchen) and sports stars (her ex-husband Tom Brady) into his sphere of influence.

He appeared to be part of a “mainstreaming” of crypto; a dishevelled gamer with a shambolic style that (weirdly) endeared him to media and financial backers.

It was, of course, all a big front. Evidence suggests SBF and his cohorts used customer funds to prop up sister company Alameda’s dodgy investments and bankroll a billionaire lifestyle.

The former golden boy (Bankman-Fried made Time’s Top 100 last year) is currently living on bail at his parents’ place, with a court case due at the end of the year. FTX co-founder Gary Wang, and the former chief executive of Alameda Research, Caroline Ellison, have already pleaded guilty to fraud and will be helping prosecutors with their case against SBF.

The downfall of FTX has shone a light on how much of the esoteric industry is smoke and mirrors: propped up by ideology and blind faith. It’s also brought crypto into the sights of regulators, who overall have had a “hands off” approach to the sector.

And the coming year will be pivotal for crypto. Will it become subject to the stringent regulation that controls the mainstream investment sector? Or will it continue to be an unregulated high-risk segment where investors can lose millions?

Useful regulation

At present crypto regulation is piecemeal, at best. Cryptocurrencies are not legal tender in most countries, and therefore aren’t considered financial products. In New Zealand crypto isn’t regulated, although NZ-based trading platforms must be registered and have membership with a scheme that offers dispute resolution.

This lack of oversight is what made it possible for FTX to take so much customer money. When forwarding cash (or crypto assets) to an exchange to facilitate trading, there are few, if any, regulations governing where these are held. This means money sent wasn’t stored for safekeeping; it was used by those at the top of the chain for their own means.

Bryan Ventura is the chair of BlockchainNZ; a membership-based group established to support and grow the crypto assets industry in this country. He says some form of regulation could be very useful for the sector.

“In New Zealand, anyone who handles money [associated with the acquisition of recognised financial products – debt security, equity security, managed investment or derivatives] is required to undergo an annual audit to see if the money they hold matches the money the customer has put in,” he says.

This isn’t the case with crypto, as it’s not viewed as a financial product because it isn’t underpinned by legal tender. However, as FTX’s demise reveals, legal tender can be used to acquire it.

Ventura feels that such custody regulation would help ensure those depositing their money into such crypto exchanges would have reassurance that it wasn’t being used for other nefarious means.

But the lack of regulation, for some, is what makes crypto compelling. If you believe the rhetoric, crypto provides an inflation and government-intervention free means by which to store value. As a recent Time article ventured: “For anti-regulation crypto enthusiasts, the decentralised nature of digital currencies […] is a big draw. So in this view, any new regulation would pose a threat to the decentralisation that is a feature, rather than a bug.”

But last year’s crypto failure proved such faith was misplaced. As inflation increased, crypto sales plummeted: it was, in fact, a key driver of the crypto winter. The ideologues are still on board, but the mainstream may have learned a hard lesson – crypto isn’t the key to instant millions.

Blind faith

For Dean Anderson this blind faith in crypto is one of great concern. “[Crypto crashes] have a disproportionate effect on disadvantaged communities, who may [due to their financial situation] be anti-system already. It’s almost seen as a golden ticket, but it is incredibly high risk.”

He’s long been a crypto sceptic, and believes the shifting narrative of the nature of crypto doesn’t help attract new investors. Bitcoin, he argues, has been around for over a decade, yet is rarely accepted as a form of currency. Is it, then, an asset class? It moves the same way as other asset classes (which it is meant to be independent of) but it isn’t subject to the same rules. And if it is, surely it should adhere to the same rules as other asset classes.

Anderson may be sceptical, but Ventura hasn’t given up on the sector. He believes crypto will experience an upswing in due course, as it did after the collapse of exchange Mt Gox in 2014.

“We are just in a bear market,” he says. “[The events of 2022] won’t kill crypto.”

He explains that, additionally, Bitcoin, the crypto bellwether, has a safeguard that makes it likely to survive. Firstly, there is limited supply: only 12 million Bitcoins will ever be created. And Bitcoin has a process built into the algorithm called “halving”. Every four years the supply of Bitcoin, and the reward for mining them, is cut: limiting inflation through the maintenance of scarcity.

Whatever the future of crypto assets themselves, the platforms on which they are traded remain a digital “Wild West”.

“Without regulation customers have no way of knowing if [someone running a platform] is legit. Regulation [of some form] would act like a backstop.”