Governments and market regulators are debating and deliberating on matters of concern and benefits of treating cryptocurrencies as an asset or a currency so that they can tax them accordingly. 2022 has shaken the financial markets with the onset of the worst crypto winters in cryptocurrency history on one hand and the collapse of a few cryptocurrencies and the exchanges that facilitate investing and trading in them. These events brought chills to the stakeholders, who began questioning the stability of the cryptocurrency and the functioning of various exchanges. Cryptocurrencies promise to be the future of currency, and hence, there is an immediate need to protect investors by regulating them – especially those cryptocurrency exchanges running in a centralized form. The case examines the collapse of FTX and other financial institutions because they exposed the structural weaknesses existing in the system. The case also examines competitor business strategies to protect themselves from such incidents and stresses the need for governmental and regulatory interventions.
TopIntroduction
“A year ago, Sam Bankman-Fried ditched his trademark shorts and T-shirt for a suit and sat before the U.S. House of Representatives as the acceptable face of crypto. Lawmakers could not see that, under the table, his shoelaces were untied.”
― Joshua Oliver & Stefania Palma,
Financial Express Weekend, U.K., December 17, 2022
The financial services industry has transformed due to innovative and disruptive financial engineered products that use emerging technologies of Web 3.0 and the Metaverse era. These have given rise to new-generation financial instruments such as cryptocurrencies and Non-Fungible Tokens (NFTs) that are backed by the fundamental concepts of blockchain and Distributed Ledger Technology (DLT). These digital currencies and assets have led to the emergence of newer forms of businesses, such as cryptocurrency exchanges and Distributed Autonomous Organizations (DAO). Cryptocurrency exchanges, also known as Digital Currency Exchanges (DCE), are online marketplaces that let investors purchase and sell cryptocurrencies in return for fiat money or other cryptocurrencies.
TopIndustry Dynamics
“The great crypto crisis is upon us.”
― Hyun Song Shin,
Financial Express Weekend, U.K., December 17, 2022
Cryptocurrency origins can be traced to 1998. However, they emerged as an instrument for alternative investment after the post-Financial Crisis of 2008. While Cryptocurrencies have had a tumultuous journey so far, they are undoubtedly considered marvelous creations of technology. However, their global acceptance is still debatable because of the lack of proper acceptance or support, particularly by Governments and regulators of various countries. Due to the complexity of the instrument, only some countries could take a clear stand. Some have officially accepted them (such as El Salvador), and few ban them (such as in China and Turkey, amongst others) or make moves towards regulating them (U.S., U.K., South Africa, South Korea, India, amongst others). Despite the mixed reactions and actions by governments and regulators, the meteoric rise in the prices of Bitcoin and other cryptocurrencies has led investors worldwide to invest heavily in cryptocurrencies due to the fear of missing out (FOMO) effect.