The Crypto Market Decline
With the publicity surrounding the public offering of Coinbase in April 2021, and the substantial increase in the value of Bitcoin and other digital currencies, cryptocurrency experienced a dramatic surge in popularity and value through early 2022. Crypto exchanges like Coinbase became popular, and widespread access to cryptocurrency was a contributing factor to the shift toward the crypto market. However, the popularity and value of crypto assets plummeted in 2022.
The extreme volatility of the crypto market initially caused market highs followed by market declines as high inflation, raising interest rates, and external factors like the Russian attack on Ukraine caused extreme macroeconomic concerns for the market. In addition, the cryptocurrency market reacted to the global economy dealing with the lingering effects of the pandemic, supply chain disruptions, and increased monetary tightening by the world’s central banks to combat inflation.
In addition, the crypto market was negatively impacted by the growth in crypto-related frauds, layoffs, and the ongoing liquidity crisis that led to bankruptcies by leading crypto companies. As a result, the cryptocurrency market’s capitalization declined from $2.9 trillion in November 2021 to $798 billion at the end of 2022.
Cybercrime
Cybercrimes grew dramatically to a new level in 2022, and the crypto markets were negatively affected as investors lost confidence. Cryptocurrency hacking is usually done through security breaches where hackers gain access to the private keys of crypto holders. However, more recently, hackers have become sophisticated enough to exploit decentralized finance (DeFi) protocols by reviewing decentralized applications’ open-source algorithms, identifying potential vulnerabilities, and exploiting the vulnerabilities. In 2022, the crypto market experienced over $3.8 billion in losses through various attacks. This was a record-breaking year for crypto hackers.
Crypto Bankruptcies
A second monumental contributing factor to the collapse of crypto has been the bankruptcy of numerous crypto companies, causing public investors to lose trust in the market. This began in May 2022, when Terra’s algorithmic stable coin Terra USD and its sister coin that backed it, LUNA, collapsed resulting in $40 billion in investor losses. The collapse of Terra USD and LUNA caused a domino effect throughout the crypto industry. In June, Celsius Network froze withdrawals, transfers, and swaps of over 1.7 million users. The company, which once had a peak valuation of $20 billion, attributed these actions as a response to “extreme market conditions.” Celsius Network’s market value spiraled, and the company filed for Chapter 11 bankruptcy, with a balance-sheet deficit of up to $1.2 billion. In July, Voyager Digital, a U.S.-based crypto lender, declared bankruptcy following a notice of default for failing to service a loan worth around $665 million to hedge fund Three Arrows Capital (3AC). The ripple effect continued, and 3AC then filed for Chapter 15 bankruptcy as a result of the liquidity crisis. The industry was hit with a shockwave when FTX, a Bahamas-based cryptocurrency exchange, filed for bankruptcy in November 2022. The fall of FTX began when a CoinDesk article revealed that the trading firm Alameda Research, owned by FTX chief executive Sam Bankman-Fried, held a position valued at $5 billion in FTT, FTX’s native exchange coin. As a result of this public disclosure, Binance, a competing cryptocurrency exchange, sold its FTT tokens holdings for approximately $529 million. This sale caused FTX to experience a liquidity crisis. Efforts by FTX to reassure investors that its assets were stable failed, and investors requested withdrawals of $6 billion. Within two days of the CoinDesk report, FTT’s value fell by 80%. FTX struggled to secure additional funding and reluctantly accepted an offer by Binance to acquire FTX.
However, the deal was canceled the following day after concerns were raised that FTX mishandled customer funds. FTX, with roughly 130 affiliated companies involved in the proceedings, filed for Chapter 11 bankruptcy. The filings indicate that FTX had assets between $10-50 billion, but also liabilities between 10-50 billion.
FTX’s downfall was the largest and most alarming collapse during 2022 and caused significant after-effects still being felt by the crypto market today. Following the FTX collapse, BlockFi filed for Chapter 11 bankruptcy due to its exposure to FTX as its second largest creditor. Core Scientific, one of the prominent Bitcoin mining firms, filed for Chapter 11 bankruptcy in December 2022 when the rapid decline of Bitcoin made it no longer profitable to mine the coin. Most recently, Genesis filed for Chapter 11 bankruptcy from exposure from FTX, after their attempts to seek emergency bailout funds for $1 billion failed.
These bankruptcies across the Crypto spectrum caused significant layoffs as major crypto firms have had no choice but to terminate thousands of workers. Coinbase released 18% of its workforce in June of 2022 and more recently laid off an additional 20% of its staff. The firm Kraken laid off 1100 employees and Bybit released 1020 employees. Approximately 24,000 employees lost their jobs in cryptocurrency in 2022, and the number continues to rise as additional companies continue to go bankrupt.
Conclusion
The tumultuous events cryptocurrency experienced in 2022 caused regulators and legislators to pay attention and exercise regulations in the growing crypto market. There was a continued push before our courts to apply security regulations to cryptocurrency offerings and to treat the offerings as securities. The work to create a regulatory framework for digital assets in the financial industry is in its infancy and has yet to catch up with the industry. However, notable court decisions, investor uproar over losses, and heightened public scrutiny should cause federal and state government agencies to implement stricter regulations.
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Reprinted with permission from the February 13, 2023 edition of the The Legal Intelligencer © 2023 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.