The Future of Cryptocurrency after FTX and Sam Bankman-Fried

Currencies traditionally derive their value from two sources: the materials they are tied to and the organizations supporting them. The story of the U.S. dollar includes both sources. In the late 19th century, Americans debated whether the dollar’s value should be backed by silver or gold. The Federal Reserve was established in 1913 to manage the value of the then-gold-backed currency. In the 1930s it began shifting to a fiat currency, with the value backed solely by the prestige of the Fed.

Cryptocurrencies are often backed by private exchanges and other financial firms. FTX, the now-bankrupt exchange, was responsible for maintaining the value of FTT, its main cryptocurrency token. As the FTX fiasco shows, these firms cannot sustain value using only a positive market outlook. They need to provide economic security and stability as well.

Modern monetary policies and institutions took centuries to achieve their current reliability—our own transition to fiat currency ended in the early 1970s, 40 years after it began—and cryptocurrency is still developing. The collapse of FTX shows that crypto needs more development before it becomes a more viable currency.

—Evan Carlisle, Ohio University, mathematics

Crypto’s Going Nowhere

In the face of FTX’s spectacular financial crimes and failures, investors are again questioning the value of cryptocurrency. Many are weary of the technology’s lack of tangibility and accountability.

And yet, while

Sam Bankman-Fried’s

corruption has exposed the dangers of an underregulated, centralized cryptocurrency exchange, the future of crypto is still hopeful.

The industry’s current failures are more relevant to debates over the bookkeeping technology that exchanges use, the capabilities of human and nonhuman auditors, the efficacy of exchange intermediaries, and the ability of regulators to guard against criminal greed and investor panic. No matter how much popular admiration is lost, cryptocurrency’s distinctly capitalist roots will motivate the innovation needed to clear the hurdles common to all emerging industries. The libertarian hopes and financial innovations that have fueled cryptocurrency’s growth have not disappeared. The industry has merely been relieved of Mr. Bankman-Fried, a bankrupt in an ill-fitting T-shirt.

—Jacob Naim, Boston College, economics

The Decentralized New Market

The fallout from FTX’s collapse should turn interest in crypto and blockchain innovation back to its original focus of decentralization.

The promise of crypto has always been the ability of individual users to make anonymous actions while keeping transactions on a public ledger, with a finite supply of currency that makes tokens immune to artificial inflation. It was never supposed to be about funnily named coins or media hype. The whole purpose of FTX, as a centralized exchange for tokens, betrays the impulse on which cryptocurrencies began.

It’s a shame that FTX has caused public perception of crypto to crater, as there are many places in the world that desperately need it. Traditional financial and legal systems require an enormous amount of trust. This trust has been betrayed time and time again, from tame regulators to rogue central bankers to corrupt politicians. From Argentina to Venezuela, Turkey to Yemen, Britain to the U.S., citizens increasingly do not trust their governments and central banks to make the right decisions for them.

Yes, blockchain technology needs time to mature. Yes, there should be more regulatory oversight to protect retail consumers. But realize this: Over the past five years, decentralized finance has attempted to match what took centuries to build in traditional markets. There have been failures, and there will be more. But the reward of a decentralized currency is great.

—Jeffrey G. Wang, Harvard University, computer science and English

No Quick Recovery

FTX provides yet another example of the failures of stablecoins. A large part of what triggered Sam Bankman-Fried’s massive losses was losses from investments in stablecoins such as LUNA.

These coins purport to track the value of another asset and act as a “sea of stability” in an otherwise volatile cryptocurrency market. And they have even been tacitly endorsed by regulators, who have not regulated firms using stablecoins as stringently as firms using other cryptocurrencies. What regulators forgot is that when a pegged asset leaves its narrow band of valuation, it often collapses spectacularly.

The selloff from FTX’s bankruptcy will force a reckoning. These assets already lack the benefit of speculative gains of cryptocurrencies and the reduced risk of traditional currency. In fact, some stablecoins have already started to drift below their face value after the selloff. With the perceived risk of these assets only going up, public-facing stablecoins may fall like a line of dominoes, undermining trust in the crypto system as a whole.

I think it is possible for the crypto sector to recover in time, but with the old tax treatment long gone, and the lack of regulation that drew many into the market in the first place, I do not see a quick and robust recovery ahead.

—Liam Bourque, University of Virginia, law

Too Good to Be True

The collapse of companies that seem unstoppable is nothing new. Think of the 2001 scandal at Enron or the 2016 revelations about Theranos. The bankruptcy of FTX is similar. When charismatic leaders with amazing ideas come along, we should ask what shortcuts they are taking. Investors should be suspicious when money is appearing out of nowhere.

Actors at FTX had huge financial incentives to make it look as though the exchange was working. A failure in which ordinary investors are the losers is hard to come back from. Cryptocurrency works like the rest of the financial industry: If people get nervous and pull out their money, it is over. FTX lost trust, its most valuable asset.

Cryptocurrency has seemed like a viable answer to questions about exchanging money across borders or the transfer of large assets. The exposure of fraud, however, will seriously damage crypto’s progress. This is another cautionary tale about the dangers of investing money when things seem too good to be true.

—Ivy Young, University of North Carolina, journalism

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