The recent collapse of FTX, once the third largest cryptocurrency exchange by trading volume, will hasten the need for regulation in the crypto industry, said Howard Marks, CEO and Co-Founder of StartEngine.
“It’s a clear, classic big explosion that will have everybody feeling that regulation is necessary at this point,” he said. “This is really the defining moment as to when regulators are given political power and investor protection power.”
Last week, FTX CEO and Co-Founder Sam Bankman-Fried filed for Chapter 11 bankruptcy protection, as FTX’s client accounts were frozen. There is speculation that FTX was using its clients’ money to fund risky trades on Alameda Research, another company that Bankman-Fried founded.
Marks claimed that regulation, such as “net capital rules” and “FDIC insurance,” would have helped prevent these losses.
“Had FTX been regulated, this would not have happened,” he said. “They would not have allowed these intercompany transactions between two parties, FTX and Alameda, which are controlled by the same shareholder.”
FTX and regulation
The prices of cryptocurrencies fell following news of the FTX collapse. The price of Bitcoin fell below $17,000 on Friday, a level it has not hit since 2020.
The FTX crisis amplified a broader downtrend in cryptocurrencies known as Crypto Winter, in which crypto prices have been falling since the start of 2022.
“I think there’s going to be a continuation of the Crypto Winter for a while,” said Marks. “And then when we emerge from it, there will be regulation and things will go great.”
However, he cautioned that regulation must be balanced against innovation.
“[The crypto sector] needs regulation so that investors are protected,” he said. “That doesn’t mean stifling innovation… it means, how do we get the confidence back from investors that this is a great opportunity financially for them?”
Crypto Winter and Venture Capital
The crypto market cap, at its peak, is estimated to have been around $3 trillion. At present, the market cap is closer to $800 billion. Venture capital (VC) funds like Sequoia and Andreessen Horowitz invested heavily in crypto companies like FTX, which may have affected their profitability.
“It doesn’t really matter,” said Marks. “Venture capital funds invest in all sorts of things. One of them is cryptocurrency companies… but they’re also investing in biotech and green tech and all sorts of great stuff.”
However, Marks said that broad macroeconomic trends would affect VC profitability.
“There is a sentiment that we’re going into a recession, and inflation is high,” he said. “What happens with venture capitalists is they get pressure from their limited partners, who are usually pension funds or university endowments, who are asking for caution.”
This, in turn, will cause the VC to see “who lives” and “who dies” in its portfolio of companies, said Marks.
“The ones who live, [the VC] will start mandating cuts and will put some more money in to keep them alive,” he explained. “The ones who die, they’re going to stop funding them altogether and then they’re on their own.”