As FTX drama intensifies, experts fear ‘consumer bias’ against crypto will grow

Both Wang and Ellison have reportedly accepted plea agreements that offer softer sentencing in exchange for their cooperation in still-ongoing investigations into FTX and Alameda Research.

Bankman-Fried himself was extradited to the US from the Bahamas – where FTX is based – on Wednesday after being arrested on December 12. The entrepreneur faces federal criminal charges in addition to lawsuits from government agencies including the US Securities and Exchange Commission and the Commodity Futures Trading Commission.

The collapse of the popular crypto exchange came last month in a historic crash that some have compared to the fall of Lehman Brothers in 2008. It was revealed that founder and crypto darling Sam Bankman-Fried was using FTX’s proprietary coin FTT to support his hedge fund Alameda Research. Ultimately, the 30 year-old entrepreneur faced a liquidity crunch when market movements motivated FTX customers to try to withdraw their funds. He’s since said that his primary focus is making all customers whole as quickly as possible.

It’s unclear how sentencing will shake out for any of the indicted parties. But industry players anticipate that those responsible will be held accountable for their failings.

“Hopefully the charges meet the crime, and hopefully the whole truth comes out in front of the public eye,” says Billy Huang, CEO and co-founder of Insomnia Labs, a web3 advertising and technology firm. “It's not every day that a handful of people can be complicit in embezzling over $10bn of consumer funds for their own personal casino. It's important that consumers understand that this isn't something that can be swept under the rug, and that the punishment will fit the crime.”

Huang expects the trials to be made public, but anticipates that a clear resolution won’t be achieved for some time.

The fall of FTX could ‘puts a black mark on the whole sector’

In the meantime, industry leaders worry that the unfolding drama will cause lasting damage to consumer trust in crypto and to markets more broadly.

“Unfortunately I think this will attract a bunch of reactionary oversight – from people who don’t understand the technology,” says Chris Gulczynski, co-founder of web3 social network Niche. “And it’ll inevitably put roadblocks in front of well-intentioned products building in the space – as well as consumer bias against them. So instead of spending time building the future, we’re forced to explain why one stupid kid was allowed to run a scam that puts a black mark on the whole sector.”

Gulczynski hopes that consumers won’t read FTX’s troubles as evidence of a systemic problem, but see it as an isolated incident. “This isn’t exposing a flaw in the system – it’s exposing unscrupulous people for being ruthlessly greedy,” he says. “The same way we don’t do away with the telephone because of phone scammers, this new suite of technology will ultimately bring the next wave of digital innovation even though there are some bad actors trying to make a quick dollar.”

Still, he warns that the consumer trend of betting on this or that token is risky and should be stemmed. “Hopefully meme coins and speculatory products find the exit soon. People should be paying attention to companies that are bringing new value to consumers based on web3 tech. Those are the ones that are in for the long haul.”

Dr Christian Catalini, a leading blockchain and crypto researcher, entrepreneur and founder of the MIT Cryptoeconomics Lab, echoes the sentiment. “My hope is that the FTX meltdown and the ones that preceded it like [what happened to] Terra and Luna are a wake-up call for entrepreneurs and investors in the space,” he says. “Crypto needs to go back to its roots and focus on solving actual consumer and business needs. The speculative phase of tokens has been a massive distraction over the actual work that is needed for the technology to reach its potential.”

But others suggest that FTX's downfall – and the widespread skepticism it's likely to invite from consumers – requires more substantive change. “The FTX crash... has shaken customer trust in the industry as a whole. This was evident in the large amount of withdrawals that immediately took place on other exchanges after the crash,” says a crypto policy expert who agreed to speak with The Drum on the condition of anonymity.

They argue that regaining lost trust from consumers will necessarily involve greater oversight. “There is clearly work that needs to be done to regain that trust, including enhanced thoughtful regulation in the space. As the dust settles and we continue to learn what actually happened, concerns around proof-of-reserves and liquidity will be top of mind for policymakers. The goal will be to regulate the industry in a way that provides consumer protection while still allowing for innovation, all the while ensuring that something like FTX doesn’t happen again.”

Still, marketers will keep betting on crypto

Despite the PR damage that the crypto industry could suffer in light of FTX's demise, some industry leaders are bullish on the sector's future with brands.

One such proponent is Michelle Harmon-Madsen, CMO at SponsorUnited, a global sports and entertainment intelligence platform that has tracked brand deals for FTX. She says that for big brands, the promise of lucrative crypto partnerships won't soon lose its glimmer.

While FTX has been the leading crypto brand sponsor in terms of deals thus far, Harmon-Madsen says, brands will simply move to the next-shiniest option. “We don’t feel the company’s stunning implosion will deter people and properties from brand deals with crypto companies,” she says, “but instead prompt them to start searching for a replacement sponsor.”

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