If asked to name one financial sector experiencing significant turmoil, it would have to be cryptocurrency. Does it have a future after the FTX and bank collapses? Given the level of uncertainty, the answer is “yes” - but under new oversight.-By Karen White

The cryptocurrency market is in turmoil due to the FTX collapse, the significant decline in crypto values, and the collapse of three banks with one heavily involved in cryptocurrency deposits. This is on top of the ongoing discussion about whether government regulators should be moving faster to oversee the cryptocurrency market. There are two different opinions. One is that cryptocurrency is here to stay, and investors know the risks. The other is that cryptocurrency needs regulation at the banking level, which could be difficult because it is nonfungible tokens intended to self-regulate and is already used by other countries. One of the reasons it was developed in the first place was to promote financial transactions without having to rely on government regulations. Assessing the future of cryptocurrencies is difficult right now, but people will always want to assume risks. Simply from that viewpoint, cryptocurrencies are here to stay.

Shaking Up the Cryptocurrency Market

The shutdown of Silvergate Bank in the U.S. in March 2023 was primarily due to poor investment decisions that gave it heavy exposure to crypto, growing deposits to $14.3 billion in deposits in 2021. Two more banks had collapsed before Silvergate was closed – Silicon Valley Bank and Signature Bank. Silicon Valley Bank collapsed due to interest-rate-management issues during a period when interest rates are rising. The New York Department of Financial Services said it did not shut down Signature Bank for crypto reasons. It actually praised the bank for its “well-regulated crypto activities.” Yet it closed the bank down anyway, basically saying a run on withdrawals and a lack of confidence in leadership was the reason.

The confusing mix of reasons for the domino-like fall of three U.S. banks shook the financial and cryptocurrency sectors. Millions of pages will be written about the closing of three U.S. banks, but the question being debated is whether this seals the fate of digital currencies. The answer is probably not, for several reasons. One is that cryptocurrency is used worldwide, with some governments already regulating it. Second is that younger generations of investors, including startup entrepreneurs, embrace new technologies. Third, cryptocurrency is a globalized investment industry, and people will invest through trading platforms, even if it means going through high-risk international platforms. Fourth, the innovation economy needs cryptocurrencies to thrive.

It would have been easier to predict the future of cryptocurrencies before the bank closings. However, despite the bank issues and the probability that most banks will exit the cryptocurrency business, unregulated new platforms and lenders will likely appear until solid regulations are put in place. The U.S. is behind many other countries in establishing cryptocurrency laws and regulations. The European Union has already passed crypto laws that take effect next year. They require crypto platforms to be transparent and rigorous in operations. The UK is currently working to establish a regulatory framework, also.

Is a Great Reset Coming?

One of the reasons startup tech companies turned to crypto for financing is because they need help finding investors due to their high-risk status. Tatiana Koffman, investor and author, wrote an opinion piece expressing the belief that a Great Reset is happening, and Bitcoin will emerge as the winner. Closing the banks that are members of a centralized system has brought back memories of 2008, when the global financial system experienced a monumental failure from, once again, high risk-taking. Koffman writes, “Bitcoin's beauty lies in its ability to store value in a decentralized manner backed by math, without requiring humans to validate or support it. No one lends out 90% of your deposits to make a profit, there is no possibility of a bank run and no one gambles with your hard-earned money on bonds.” She goes on to say that eventually, people may rely on Bitcoin and sell cryptocurrency when needing stablecoins to pay daily expenses. Bitcoin and other cryptocurrencies offer a self-custody model for money management. Stablecoins are cryptocurrencies tied to another asset, like money or gold, similar to how the U.S. dollar was once on the gold standard.

It is important to realize that small businesses unable to get funding through traditional means are the source of innovation. If cryptocurrency becomes inaccessible, it will hurt the innovation economy. Eric Edleman is the founder of the Digital Assets Council of Financial Professionals. He predicted in January 2023 that “500 million people worldwide would own Bitcoin by the end of 2023.” There are also NFT investments predicted to increase as companies like Disney and Starbucks participate in the NFT market.

One thing that is not in doubt is the use of blockchain in business transactions. Blockchain is not cryptocurrency. It is computer coding that increases transaction transparency, security, and traceability. It is revolutionizing purchasing and logistics because it enables tracking contracts from end to end. In fact, blockchain is likely to become even more important going forward, because of its ability to reduce risks. However, it will need to decouple itself from cryptocurrency to avoid harming its market image, which would discourage companies from using it.

All Shook Up

There is no simple answer to cryptocurrency’s fate in the future. There is likely to be a shake-up of the cryptocurrency sector, as the trust of people and businesses waver in light of the collapse of FTX and the three banks. However, many important lessons can be learned that can lead to a more robust cryptocurrency market. There is already increased awareness of the risks of investing in cryptocurrency, and new crypto-friendly financial institutions will develop. It is also important to remember that one bank, not three, collapsed because it took too many investment risks involving cryptocurrencies. It will take some time for all the impacts to shake out, but 2023 will undoubtedly be a pivotal year for cryptocurrencies and NFTs.