Crypto Firms Adapt to Evolving Industry Following FTX Founder’s 25-Year Fraud Sentence

Sam Bankman-Fried, the disgraced founder of FTX, received a 25-year sentence on Thursday for his role in the fraudulent loss of billions in FTX customer funds, yet players in the cryptocurrency space say the FTX drama is a relatively small part of challenges now faced by the industry and its investors.

Chamath Palihapitiya, founder and CEO of Social Capital.

“The market has shrugged it off and looked at it as an isolated instance of fraud rather than something that is systematically related to crypto,” said David Sacco, a faculty lecturer at the University of New Haven focused on the cryptocurrency regulatory environment.

In 2022, after FTX collapsed and Bankman-Fried was indicted, regulators renewed calls for greater oversight and venture investors appeared likely to pull back from crypto-related investments. Now, two years later, stricter regulation has come, but appears as much a result of the proliferation of crypto-backed securities and investment products—not strictly because of the FTX situation, say the experts who spoke to Transacted.

However, Nabeel Qadri, managing partner at Protocol Ventures, a San Francisco-based crypto fund-of-funds, said the Bankman-Fried saga did cause damage to the industry.

“His actions already impacted the regulatory landscape and that’s been reflected in the U.S. regulatory bodies’ approach to regulating crypto,” Qadri said. “This has had ripple effects on the industry and made it hard for U.S. market participants to capitalize on Web 3.0. Exchanges are avoiding the U.S. at all costs with the likes of the SEC and the DOJ’s scrutiny.”

Against the backdrop of a changing regulatory environment, crypto-focused investors have also had to contend with aggressive fluctuations in cryptocurrency values over recent years.

That’s proved challenging for portfolio company exits and new fundraising. Compared to 2022, last year’s capital raised for new crypto-focused hedge funds and venture firms fell nearly 85 percent to just $5.8 billion, according to data from digital asset capital markets firm Galaxy Digital.

This year’s rebound in cryptocurrency prices may help to ease some of the pain, though the real focus will be on firms’ ability to return capital back to their limited partners.

For firms actively deploying capital, new investments may need to contend with yet more regulatory oversight in the coming years, which Sacco believes is inevitable.

“The more that crypto moves into the realm of accepted securities or mainstream securities markets, the more it will be subject to that same type of regulation,” Sacco said. “Market participants that view crypto as a viable asset welcome the regulation.”

“There’s still a lot of risk from a technology standpoint, and because this market is so new, but it’s shown incredible resilience, just look at the price of bitcoin right now compared to where it was two years ago,” Sacco said.

He added that, ultimately, the Bankman-Fried saga could be interpreted as a sign of crypto’s staying power.

What Bankman-Fried did and what they did at FTX had nothing to do with the fact that the assets were crypto assets. The issue was fraud. If anything, it proved the residency of the underlying asset.”

Bob Clair

Bob Clair is a reporter at Transacted covering private equity and investment banking. He has covered breaking M&A news for several years and is a general assignment freelance reporter for The New York Times, where he shared in a 2021 Pulitzer Prize win.

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