The downfall of crypto exchange FTX and its founder Sam Bankman-Fried (SBF) has been described as the "Lehman Brothers" moment of cryptocurrency. Its demise is impacting other cryptocurrency platforms as investors and customers rush to retrieve their money.
In continuation of our series, "What to do in a bear market," Yahoo Finance spoke to crypto industry experts to put into perspective what happened, and how to handle the losses from fallen exchanges.
There's a lot of retail investors that have been trading crypto on various platforms for the past two years. And now they are probably sitting on huge losses. What specifically needs to happen to restore investor confidence?
More initiatives from the industry is one of various ways to shore up confidence, according to Oppenheimer executive director Owen Lau.
He cites the recovery fund recently announced by crypto exchange Binance in order to help crypto projects facing liquidity squeezes.
“Hopefully these private market solutions can reduce the damage driven by FTX,” said Lau recently told Yahoo Finance Live.
“Number two, I think it really takes time for the industry to show more transparency. For the investors, that this industry could be stable and they can run a sustainable model,” he added.
“Number three ... I hope when the industry can introduce more use cases to the customers, the confidence hopefully can come back,” said Lau.
Which are the figures in crypto that still remain who investors can trust?
“The crypto of Bitcoin is still a 10-year-old product, a 12-year-old product. And it's fair to say that it's still a pretty fragmented market,” said Lau.
“I would say after this event, we will see the leader emerge. And in particular a more regulated platform and more transparent platform will eventually emerge to be the leader. But we'll see over the next 6 or 12 months in how these things play out,” he added.
The problems crypto holders have faced so far deal with exchanges such as FTX, Celsius and Voyager. What is the difference between holding crypto in an exchange versus an outside wallet.
“The most important difference between holding your cryptocurrency on an exchange versus an outside wallet is custody,” Heidi Chakos, Crypto Tips YouTube host, told Yahoo Finance.
“For some people, the thought of having to figure out a wallet by themselves is too overwhelming and that keeping coins on an exchange is easier,” said Chakos.
“However, what hundreds of thousands of people have unfortunately learned from experience, especially over the past 6 months, is that once you deposit or hold cryptocurrencies on an exchange (or any centralized, custodial platform) you are giving true ownership of those cryptos to whomever is running that exchange,” said added.
“A famous phrase in the crypto crowd is ‘be your own bank.' You no longer need a bank or outside entity to secure your wealth. It can easily be done using hardware wallets. There is so much free information now online and on YouTube that show step by step how to set up and use any kind of wallet. They are also quickly becoming very user friendly,” said Chakos.
The FTX bankruptcy is now in the hands of the courts. What will happen to the more than 1 million creditors who are on the hook for losses?
Determining the value of the assets and transforming them into real dollars in the bankruptcy court will be one of the main challenges.
“What is the value of the asset in bankruptcy. Trying to determine the liquidated value of FTX subject to distribution to creditors I think is going to be a rather unique challenge,” Kenneth Feinberg, former administer for the 9/11 Victim Compensation Fund, told Yahoo Finance Live on Friday.
Identifying who is an eligible creditor will be another challenge.
“How many of those creditors can demonstrate a loss? Are they going to really come forward, give their name give their address, designate the amount of the loss, prove that loss in a currency that is very very opaque,” said Feinberg.
Given that so many investors and crypto exchange customers have been burned so far, what’s next for the future of digital assets?
“I don’t disagree that some of the investor confidence—some of the customer confidence has been impaired. But having said that we are still optimistic about the long term future of blockchain and digital assets,” said Lau of Oppenheimer.
He believes the next phase of blockchain adoption will focus more on the use cases for these technologies.
“We know we talk a lot about the first utility is trading and speculation. But there are actually many other utilities, use cases out there in the payment space … and also in the lending space.”
Sam Bankman-Fried had met regularly with lawmakers in order to influence legislation surrounding digital assets. Some industry participants are now calling for regulation to protect investors and customers. What do you expect will happen on that front?
“We have legislation that was already in bill format in the House and the Senate. I think a lot of the SBF, FTX favored legislation will probably not survive at this point,” Cathy Yoon, MPCH Labs chief legal officer recently told Yahoo Finance Live.
“There are a ton of other bills and in front of Congress. I don't think we're going to see them moving forward quickly right now. I do think there is a call for answers. There are a lot of questions. People want answers. There could even be hearings before the end of the year,” she added.
“When it just comes to regulation of the space in general, I know a lot of people are calling for it. They want immediate action. But I think at the heart of things, we really have to remember this really is a fraud first and not necessarily something that touches all of the crypto space in general,” added Yoon.
Ines is a business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre