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It has been touted as the future of finance. Today, the world of cryptocurrencies is in complete disarray.

The fallout from the catastrophic collapse of crypto exchange FTX is spreading, and a months-long so-called “crypto winter” shows no signs of letting up. Bitcoin’s value is down almost 70% from its all-time high in November 2021.

This is a big change from a year ago. At the time, crypto companies were spending tens of millions of dollars marketing their trading platforms during the Super Bowl broadcast, with celebrities like Tom Brady promising to democratize finance.

But today, doubts are growing about the future of crypto.

“The industry is facing this crisis of legitimacy,” said Morningstar analyst Madeline Hume.

Here are three things that will determine the fate of crypto in the coming year.

The Continuing Fallout of FTX’s Collapse

Founded by 30-year-old Sam Bankman-Fried, FTX was valued at $32 billion a year ago.

Today, the company is bankrupt, and hundreds of thousands of customers are desperately trying to recover money that seems to have disappeared. Wall Street’s top cop, the Securities and Exchange Commission, alleges that Bankman-Fried “orchestrated a years-long fraud.”

Now Bankman-Fried faces eight counts, and if a jury finds him guilty, he could spend the rest of his life in prison. Bankman-Fried denies any wrongdoing and he pleaded not guilty during a hearing earlier this month.

The collapse of FTX laid bare just how interconnected the crypto industry is. Some companies exposed to FTX have been affected, including BlockFi, a crypto lender that collapsed last year.

Other companies have suffered, including Silvergate, a bank that caters to crypto companies. In the fourth quarter, it posted a net loss of $1 billion.

An exterior view of FTX Arena before a game between the Phoenix Suns and the Miami Heat in Miami on Nov. 14, 2022. When times were tough, cryptocurrency companies hired celebrities and bought the naming rights to stadiums.

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An exterior view of FTX Arena before a game between the Phoenix Suns and the Miami Heat in Miami on Nov. 14, 2022. When times were tough, cryptocurrency companies hired celebrities and bought the naming rights to stadiums.

In 2023, we’ll learn more about what led to FTX’s implosion as prosecutors and regulators sift through transaction databases and reams of documents.

Ultimately, according to Hume, the fall of FTX showed just how risky crypto really is.

“There really is a lack of adequate investor protection and risk management,” Hume said. “Even down to simple accounting and compliance brass stuff.”

Regulators are alarmed – and lawmakers too

The SEC, keen to protect amateur investors in cryptocurrencies, is cracking down on companies in the sector.

Last week, the SEC accused struggling crypto bank Genesis and its sister company, Gemini, of failing to register its lending program with the regulator, in violation of US securities laws.

The fall of FTX has also alarmed lawmakers, many of whom have responded with calls for new crypto-focused legislation.

But there is still a lack of clarity when it comes to cryptocurrencies. There is even disagreement on the definition of the categorization of cryptocurrencies as securities.

Currently, the two major financial regulators, the Securities and Exchange Commission and the Commodity Futures Trading Commission are also engaged in a turf war over who should regulate what – a decision that will be up to Congress.

Cryptos have been clubbed. Can they recover?

Although Bitcoin proponents suggested it would be a good hedge against high inflation, it didn’t work out at all.

Instead, cryptocurrencies crashed along with other investments such as stocks last year as inflation hit its highest annual rate in about 40 years, forcing the Federal Reserve to aggressively hike. interest rates.

The recovery of bitcoin and other cryptocurrencies will likely depend on the behavior of broader markets.

A cryptocurrency ATM at a convenience store in Miami is shown on May 12, 2022.

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A cryptocurrency ATM at a convenience store in Miami is shown on May 12, 2022.

And for crypto at large, it may be a matter of survival.

Alkesh Shah, global crypto and digital asset strategist at Bank of America, says crypto is undergoing what he calls “a really healthy reset.”

“There are around 22,000 tokens traded on around 170 exchanges around the world, and most of those tokens have next to no intrinsic value,” he notes.

Shah expects some severe winnowing that could drop the token count to around 50.

Morningstar’s Hume points out that the crypto has weathered downturns before and is unlikely to go away completely.

But, she acknowledges, the way forward is difficult.

“When you look at crypto, and what needs to happen, to regain trust, it’s going to be brick by brick,” Hume says.

Copyright 2023 NPR. To learn more, visit https://www.npr.org.





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