A nine-page document circulated on an obscure mailing list not long after several Wall Street banks failed in 2008, proposing a new type of financial system that would never rely on any "neutral third party."
The paper served as the foundation for the cryptocurrency market. Its supporters vowed to conduct business in a transparent and egalitarian manner, rejecting the high-risk practices of a small number of powerful financial firms that caused the Great Recession.
However, the actions of a single cryptocurrency firm — the $32 billion exchange FTX — threw the emerging industry into its own version of a 2008-style crisis last month. FTX once thought to be a safe marketplace for people to trade virtual currencies, declared bankruptcy following the crypto equivalent of a bank run, forcing corporate executives, investors, and enthusiasts to grapple with how a technology meant to correct traditional finance's flaws ended up trying to replicate them.
Executives who were reveling in crypto's seemingly unstoppable growth one year ago are now trying desperately to demonstrate that they can learn from their mistakes and recapture the industry's early ideals. Binance, the world's largest exchange, announced last month that it would release more financial information and hire independent auditors to review it. Coinbase, the largest cryptocurrency exchange in the United States, declared its commitment to a "distributed network where you don't have to trust us."
Many cryptocurrency supporters are calling for more drastic changes, trying to persuade investors to avoid storing their digital holdings with large corporations and instead turn to more experimental platforms run entirely by code.
FTX's demise, however, demonstrates how far crypto remains from fulfilling its original goals and gaining widespread acceptance. Consumer skepticism has grown this year as a result of major financial losses, criminal investigations, and a more skeptical regulatory climate in Washington. Changpeng Zhao, Binance's CEO, stated at a conference last month that the implosion of FTX would establish the market back several years.
The exchange's demise added to months of losses in the digital money market, which began with a devastating crash in the spring and unfolded alongside a broader pullback from riskier investments. Some prominent cryptocurrency firms declared bankruptcy as a result of the upheaval. Bitcoin, the first and most popular virtual currency, has been trading at less than $17,000, down roughly 75% from its all-time high of nearly $70,000 almost exactly a year ago.
"You start to go through these problems, and they pile up one after the other," said John Reed Stark, a former Securities and Exchange Commission official turned outspoken crypto critic. More and more people are now seeing this for what it is: a scam."
Following previous crashes, the crypto industry has recovered, attracting big-name investors who have poured even more money into experimental companies. However, the collapse of FTX has been widely described as the worst moment in the industry's brief history.
The beginnings of cryptocurrency can be traced back to 2008, when a mysterious figure known as Satoshi Nakamoto published a white paper on Bitcoin, outlining a detailed vision for what would become cryptocurrencies. The paper described Bitcoin's technological foundation, which was a publicly viewable ledger known as a blockchain, in which transactions would be recorded for all to see.
Early supporters believed Bitcoin could serve as the foundation for creating a more transparent, egalitarian financial system. Many of the paper's supporters were libertarians who had grown tired of conventional banking, particularly the power concentration among a few large corporations.
Initially, the primary application of cryptocurrency was criminal. Thieves and drug dealers used Bitcoin to transfer large sums of money without the use of a bank or another intermediary.
However, as law enforcement became more adept at tracking crypto crime, the technology evolved to allow for more sophisticated financial applications such as borrowing and lending. People who began their careers on Wall Street, such as FTX's founder, Sam Bankman-Fried, who worked at the trading firm Jane Street, became involved in the way of conducting business, hoping to profit from the technology.
As the industry grew, it began to resemble some of the Wall Street institutions that it was intended to replace. Crypto trading became increasingly centralized, with the majority of transactions taking place on a few large exchanges such as Binance, FTX, and Coinbase. According to an industry data tracker, in the months leading up to FTX's demise, the trading volume of cryptocurrencies on Binance alone was greater than the combined totals of its seven closest competitors.
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According to Charley Cooper, managing director at blockchain company R3, the original vision of crypto "was an attempt to rewrite the rules of finance on a global scale." "And here we are again — we're in an industry that is even more centralized than banking."
Until May, the value of cryptocurrencies skyrocketed last year and into 2022. That's when the popular cryptocurrency Luna crashed, sending the crypto economy into a tailspin. Celsius Network and Voyager Digital, two major lending companies, have declared bankruptcy. Enthusiasts bemoaned the start of a "crypto winter" of low prices and waning enthusiasm.
FTX was seen during the crisis as a reasonably reliable force. The Bahamas-based company provided high-risk but popular trading options that are forbidden in the US, acting as a market place for people to buy and sell cryptocurrencies. The 30-year-old Mr. Bankman-Fried, who turned FTX into a $32 billion business, was regarded as a kind man who would extend a helping hand to coworkers.
Then, last month, a deposit run revealed an $8 billion hole in FTX's accounts. Within a week, the company declared bankruptcy. The Securities and Exchange Commission and the Justice Department launched investigations into whether FTX illegally lent its users' funds to Alameda Research, a crypto hedge fund founded and owned by Mr. Bankman-Fried.
The implosion has been dubbed a "Lehman moment" for cryptocurrency, referring to the investment bank whose collapse triggered the 2008 financial crisis. Other companies with ties to FTX began to tremble. BlockFi, a crypto lender that FTX bailed out in the spring, filed for bankruptcy last Monday, citing its entanglements with Mr. Bankman-Fried.
Some prominent crypto figures have attempted to spin FTX's demise as a positive development, arguing that it will redirect energy toward finding practical applications for the technology.
"This is a fantastic opportunity for us," said Jeremy Allaire, CEO of crypto payments company Circle. "We're delivering real value, and those who focused on building massive speculative trading casinos are unhappy."
Binance does essentially the same thing as FTX, but Mr. Zhao, the CEO, has recently been careful to distinguish himself from Mr. Bankman-Fried, calling his former rival a liar and criticizing FTX's most risky practices. On November 25, Binance announced a new "proof of reserves system," promising to keep users informed about the amount of cryptocurrency in its accounts and assuaging concerns that it could be vulnerable to the type of run on deposits that destroyed FTX. Binance's plans were heavily criticized due to a lack of critical information.)
Coinbase has also attempted to allay customers' fears of a collapse by publishing a blog post in which it stated that it always holds the same amount of money that customers deposited. "A 'run on the bank' at Coinbase is not possible," the post stated.
Nonetheless, some industry experts argue that the mere existence of large companies like Binance, Coinbase, and FTX is antithetical to the ideals of cryptocurrency. Since FTX's demise, some cryptocurrency enthusiasts have gravitated toward smaller firms in the experimental field of decentralized finance, which allows traders to borrow, lend, and conduct transactions without the use of banks or brokers, instead relying on a publicly viewable system governed by code.
However, Defi has its own issues, including vulnerability to hackers, who have stolen billions of dollars from experimental projects this year.
"They've based it on clunky technology that is very inefficient," said Hilary Allen, an American University finance expert. "They're very vulnerable operationally."
Washington's scrutiny has also increased. The SEC's chair, Gary Gensler, has promised to pursue crypto companies for securities law violations. On December 13, the House Financial Services Committee will hold a hearing to investigate FTX's demise.
Mr. Bankman-Fried has been summoned to give testimony. In interviews with The New York Times, he appeared to be both distressed and dismissive of FTX's bankruptcy.
"You know, the crypto winter has been officially extended," he said in one interview.
Wasn't that a slight, appropriate description? "Yep," he said. “Alas.”
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