Crypto Industry Fights for Investor Trust Post-FTX

Still wobbling from the FTX crypto crash, 2023’s cryptocurrency outlook is much shakier than 2022’s.

This time last year, cryptocurrencies were poised — and priced — to take over the world.

As macro headwinds buffet consumers and over-leveraged implosions pockmark the sector landscape, industry observers openly doubt whether crypto even represents the inflation hedge it once promised.

In January 2022, cryptocurrencies were on such a meteoric rise that so-called “memecoins” like Dogecoin were being mocked into usability. As we head into 2023, the underlying premise of crypto’s usability has subsequently found itself as a focus of mockery and derision.

Numerous executives told PYMNTS that 2022 would be the year people started using Bitcoin and other cryptocurrencies for mainstream payments and purchases.

Today, that window of opportunity is closing, and the road to mass acceptance of crypto as a payment choice is increasingly shaping up to be bumpy.

What Industry Leaders and Academics Are Saying Now

“It’s definitely a different time for crypto,” Mary Ruppert, Chief Compliance Officer of Zero Hash told PYMNTS. “The enthusiasm is still there, but recent events have made people cautious about things like internal controls, governance, and making sure your business is functioning as a mature business.”

The crypto industry is as young as the majority of its founders, and as these early, wild west-era days come under a stronger regulatory microscope, the importance of back-of-house compliance controls in establishing broader consumer trust is coming into stark relief.

“What I find amazing in all this,” Ron Kruszewski, Chairman and CEO of Stifel told PYMNTS earlier this month, “is that I’ve yet to see crypto leaders go out and say ‘we segregate our clients’ funds and our clients’ securities.’ Until they can say yes to that, the industry will not move forward. It needs to be, ‘ You give me your money, I promise I will give it back to you.’”

Stifel’s Kruszewski is the single longest-serving chief executive of any of the major investment banks, leading the public financial services company for nearly twice as long as the nascent crypto industry has been in existence.

One of the most critical failures in the FTX saga was the astounding lack of “common sense internal controls” across the enterprise group of companies, as the bankruptcy filings put it.

Some leaders see the fraud in the industry as less endemic to crypto and more as isolated incidents that represent dirty bathwater, so to speak, more than they do baby.

“The backdrop for me is that the entire world of finance has clearly taken a correction, mainly led by high interest rates,” Michael Gronager, CEO and co-founder of blockchain intelligence company Chainalysis said to PYMNTS. “A lot of companies, including Facebook, Netflix, have actually performed worse than the average [actor in the] crypto space … I don’t think when we look at crypto ten years from now, that we will even consider FTX a setback.”

A Regulatory Gamble

“Cryptocurrency did not invent over-leverage, did not invent bad risk management; cryptocurrency did not invent bad internal controls,” Misha Graboi, CFO at Chia Network, emphasized during a past interview with PYMNTs. “But what started out as an extremely promising set of technologies to provide essentially transactional and custodial infrastructure … ultimately devolved into a gigantic casino.”

New York University Leonard N. Stern School of Business Hanna Halaburda told PYMNTS in November that if the industry is to mature, it’s important to unpack whether there is “anything special about crypto where [retail investors] get roped in more [than with other investment opportunities.] … I do think that making a bigger deal of voluntarily complying with [existing] regulation can go a long way.”

Read More: Pulse Check on Capitol Hill’s Plans for Crypto Markets Regulation

“The U.S. has the most sophisticated, deep and fair markets in the world because we put good rules and regulations in place, and we need to do that for crypto,” Stifel’s Kruszewski said to PYMNTS separately. Adding, “then crypto can flourish and [consumers can] enjoy its true business applications versus where it stands now, unregulated, just a casino.”

Following the summer-into-fall washout of cryptocurrency exchanges and hedge funds like Three Arrows Capital and FTX, even stablecoins like TerraUSD, crypto faces ever-important regulatory and perception challenges.

“While it may be possible to institute a system of safeguards into a new regulatory framework, it is extremely difficult to get right and extremely difficult to enforce because the digital asset sphere is so dynamic and dependent on technology — and technology moves much faster than regulators do,” law professor Saule T. Omarova said to PYMNTS in November 2022.

Blockchain Blockages

“It’s terrible that what happened did happen,” Stephen Pair, CEO of blockchain payment processor BitPay told PYMNTs in a recent interview that touched upon the FTX collapse. “That it was allowed to happen. But nothing about the underlying infrastructure or architecture of Bitcoin or other blockchains has really changed. As we move forward, my view is we will see the decentralized technology underpinning the blockchain industry help create a new foundation for building more secure systems.”

As businesses expand operations, they frequently run into new regulations and business controls, including those affecting payments.

“I think with recent events, there might be a bit more of a ‘monkey-see, monkey-do’ situation surrounding [the adoption of crypto payments],” Gary A. Vecchiarelli, CPA, CFO at CleanSpark added in a separate discussion with PYMNTS. “People are going to wait for someone else to do it first.”

While the “get rich quick” excitement that once surrounded crypto has dulled, 2023 could be the year when crypto’s underlying blockchain technology emerges from that volatile shadow and finds its own sustainable use case and way to shine.

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