Crypto exchanges, regulatory battles and the future of governance
Welcome to Crypto History, a Cointelegraph series that takes readers back to the most important events in the crypto space. Powered by Pemex, the timeline allows members of the crypto community to explore and view important events that shaped the industry to what it is today.
This article was published in It covers the period after November 2022, when the FTX exchange crashed, resulting in one of the most notorious crypto winters in the history of digital assets.
The period after the collapse of the FTX exchange is known as one of the darkest periods in crypto history.
The collapse of FTX and its more than 130 subsidiaries sparked a chain of bankruptcy and layoffs among Web3 companies, leading to one of the longest crypto winters in history, sending the price of Bitcoin (BTC) down $16,000.
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Following the loss of $8.9 billion in investor funds, regulators have been forced to take action and emphasize transparency for crypto exchanges and service providers by developing more investor safety-focused frameworks.
US regulators have issued one of the most significant criminal fines in history for Binance, despite the lack of evidence of misuse of user funds. They also penalized smaller exchanges for trying to prevent an FTX-like meltdown.
How did FTX fail?
The now very popular FTX exchange collapsed almost a year and a half ago, sending shockwaves through global crypto markets and wiping out tens of billions in value in a matter of days.
In essence, FTX's misappropriation of user funds caused sister company Alameda Research billions in business losses. BANMAN-FRIED unauthorized transfers of FTX client funds to support Alameda's trading losses, the quantitative trading firm now known as the Alameda Gap.
Alameda was losing more than $500,000 a day in a terrible month before she got the quantitative trading protocol from Gary Wang, according to Michael Lewis in his biography of Bankman-Fried.
The misuse of user funds began to unravel in November 2022 when it was discovered that most of Alameda's balance was in FTX's FTT token.
The revelation led to a massive sell-off, causing the price of the FTT token to drop, sparking widespread concern about the financial health of FTX and Alameda Research. This resulted in a massive withdrawal of up to $6 billion from customers in three days. FTX was forced to block and was unable to withdraw funds.
FTX filed for bankruptcy on November 11, 2022. Banman-Fried was arrested in the Bahamas on December 12, 2022, after US prosecutors filed criminal charges against him. He was extradited to the US in January 2023. Bankman-Fried was sentenced on March 28, 2024 to 25 years in federal prison.
Related: Alameda Research's FTT simulation from September transfer fuel wild speculation
The theft of control after the failure of FTX
The collapse of the FTX exchange sparked a response from the United States Securities and Exchange Commission (SEC), which launched a broader crackdown on crypto exchanges to prevent another FTX-like meltdown.
In June 2023, the SEC sued Coinbase and Binance Exchange for securities violations. In its lawsuit against Binance, the SEC alleged that the company and its founder, Changpeng Zhao, misappropriated billions of users' funds.
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Despite no evidence of misuse of user funds, Binance was accused of violating anti-money laundering laws and ordered to pay one of the most significant criminal fines in history, estimated at $4.3 billion.
Regarding the Coinbase case, the SEC alleged that the exchange acted as an unregistered exchange, broker and clearing agency and violated securities laws by listing 13 tokens it claimed were securities, according to a June 2023 lawsuit.
Coinbase sought an injunction to dismiss the case, questioning the SEC's jurisdiction over crypto exchanges. The exchange's request to drop the legal case was rejected on March 27, allowing the SEC to continue its lawsuit against Coinbase.
The immediate regulatory response is focused on prosecution and enforcement rather than the implementation of specific blockchain regulations, TDeFi Legal Head Ashar Burney told Cointelegraph:
“This approach reflects a broader trend where regulators are focusing on criminal behavior and addressing fraudulent activity in the crypto space through existing legal frameworks, rather than enacting new regulations based on blockchain technology.”
Burney added that FTX's failure was primarily “a matter of criminal fraud, not a lack of regulatory frameworks.”
Related: Paradigm Leads $225M Funding Round for New ‘Solana Killer' L1
How the regulatory landscape has evolved since FTX
Following the collapse of FTX, crypto exchanges have begun to strive for greater transparency, led by Binance, the world's largest exchange.
In the year At the end of November 2022, Binance launched its Proof of Proof (PoR) system, which shows the amount of assets held on behalf of users. The purpose of this third-party audit is to demonstrate to users that the exchange can meet any withdrawal requests. Binance's core assets have been oversubscribed by at least 102% since April 12, according to the PoR.
Following Binance's transparency push, other top exchanges followed suit, including Coinbase, OKX, Crypto.com, Kraken, and Bybit.
Despite the new PoR audit system, investors should still conduct due diligence as FTX has conducted multiple financial audits that did not detect fraud, TDeFi's head of legal, Bernie, told Cointelegraph:
“The SBF company has undergone numerous audits by reputable auditing firms, demonstrating the complexity of detecting fraudulent behavior even with proven compliance measures. In general, investor safety is not significantly different, especially considering that the crypto industry has low fraud rates compared to traditional fintech and investment sectors.
Cointelegraph spoke to DFG founder and CEO James W. Beyond crypto exchange transparency efforts, governments around the world are taking a more collaborative approach to regulating the nascent crypto industry.
Although countries have different stances, some more crypto-friendly than others, they all work towards the same goal of implementing anti-money laundering (AML) in countries where Know Your Customer (KYC) is not sufficiently transparent. Ban him.
In May 2023, the European Council approved the first comprehensive legal framework for the crypto industry. The Markets in Crypto Assets (MiCA) framework aims to protect investors with more stringent transparency standards and AML rules.
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Thanks to the new MCA bill, crypto exchanges will become fully regulated entities from the end of 2024, Vyara Savova, senior policy leader at the European Crypto Initiative, told Cointelegraph.
“2024 is the year of MiCA, and the entire EU will now have a common legal framework for crypto-assets, crypto-asset services and crypto-asset service providers (also known as CASPs). Crypto exchanges are a form of CASP under MiCA and will be fully regulated by December 2024.
While the MCA is an important step for the global regulatory landscape and investor safety, its effectiveness depends on the implementation of each member state, Savova explained.
“An important aspect that is often overlooked is the role of the laws of the member states in the implementation of this regulation, because these laws create a regulatory framework in the country.”
Hong Kong and Dubai have introduced crypto regulations that support innovation in an effort to become known as global crypto hubs. However, the most regulatory signal came in January 2024, when Bitcoin Exchange Traded Funds (ETFs) were approved in place.
Related: TradFi Wall Street Firms Pushing Ether ETF Approval, Former Binance Labs Head Says
Bitcoin ETFs represent an innovative approach, but investors are not necessarily safe
After months of regulatory battles, ten Bitcoin ETFs were approved by the United States SEC on January 10, allowing traditional investors to gain exposure to BTC through publicly traded funds.
The ETF's approval is a positive sign of a future innovation-friendly approach from US regulators, DFG's Wo told Cointelegraph.
“Despite lawsuits against several crypto exchanges, the SEC has previously approved Bitcoin ETFs along with Ethereum ETFs. This is a sign that governments are more supportive of regulation than outright banning it, as seen in many other countries where regulators are proposing stricter regulations for licensing crypto-related businesses.
The adoption of the US EFF also prompted other jurisdictions to follow suit. Hong Kong's Securities Regulatory Commission (SFC) may approve the first four positions Bitcoin ETF applications on April 15 after the financial regulator accelerated the approval process for the first ETFs.
Related: Hong Kong regulator fast-tracks Bitcoin spot ETF approvals
Despite significant global regulatory developments around ETFs and crypto exchanges, investors aren't necessarily protected from another FTX-like meltdown, according to DFG's Wo:
Although regulation and compliance have increased in regulated entities, it does not mean that it will not happen again, even if we can expect better risk management from these entities. In general, as long as you don't click on phishing or scam links that can end up draining your wallet, self-maintenance is still the safest as you're in control of your own funds.
Related: FTX Moves to Drop 8% Anthroponic Share
Looking forward to 2024 and beyond
The FTX collapse prompted widespread cooperation among global regulators to prevent another high-profile meltdown. Some of the world's leading economies have developed new regulations for crypto exchanges, while Europe has passed the first comprehensive framework for the crypto industry, setting the benchmark for other regulators.
The European MCA framework is still a work in progress. The next major part of the bill, according to Savova, senior policy director of the European Crypto Initiative, told Cointelegraph that it would set standards for trading relationships for crypto exchanges:
“It is CASP that will be developed throughout 2024, and thus, the exchange of marketing communications and approvals. It is a very important topic that emerged in France and is now being discussed at EU level in the retail investment strategy.
The second consultation package under MiCA's reverse charge guidelines will be finalized on April 29. The outcome of the consultation will have implications for the final implementation of the MCA in December, Savova said.
“[This will determine] How exchanges from countries outside the EU and other CASPs offer services to EU citizens without a license and how these services should be sold in Europe. The results of this consultation will be crucial to the implementation of the MICA in December.
According to TDeFi's Burney, crypto service providers could still see more regulatory scrutiny, including stricter disclosure and compliance requirements, leading to a more mature industry. Bernie said:
“These developments reflect a transition to a mature regulatory framework designed to balance innovation with regulatory oversight. But obtaining a license in the U.S. may prevent exchanges from operating globally and serving U.S. customers entirely, highlighting the challenges of regulating a decentralized and global industry.
Related: Binance Labs Shifts Investment Focus to Bitcoin DeFi
