JPMorgan: Crypto industry to undergo changes after FTX’s insolvency

According to global financial services firm JPMorgan, the crypto industry will undergo significant changes after the collapse of the cryptocurrency exchange FTX.

Nikolaos Panigirtzoglou, an investment strategist at JPMorgan, said regulators had started to look into overseeing the crypto industry after Terra’s collapse—which had a snowballing effect on other crypto companies, including Three Arrow Capitals—earlier this year. The FTX implosion, which is expected to bring a widespread contagion effect, further increases the demand for crypto regulation.

Earlier this month, FTX filed for Chapter 11 following a situation that then-CEO Samuel Bankman-Fried had called a “liquidity crunch.” The exchange was not able to accommodate customer withdrawals due to the lack of liquidity. Later the bankruptcy court filing revealed that Bankman-Fried had misused customer funds for his trading company, Alameda Research.

Panigirtzoglou added that FTX’s failure to maintain the health of its balance sheet would increase pressures on crypto institutions to disclose their balance sheets.

Several crypto entities, including Binance, have published their balance sheets to assure investors that they have healthy finances. Some others, like Grayscale Investments, refused to disclose their balance sheets due to security concerns.

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Panigirtzoglou discussed several regulatory changes that likely would be implemented in the future. According to him, a bill proposed by European Union’s Markets in Crypto Assets (MiCA) to improve customer protection will be approved before the end of 2022. This bill is expected to be effective in 2024.

Regarding the regulatory prospect for crypto in the U.S., Panigirtzoglou predicted that lawmakers would debate whether to classify crypto assets as securities or commodities.

Last September, the U.S. Securities and Exchange Commission (SEC) chief Gary Gensler said that Bitcoin should be classified as a commodity, while other tokens could be considered securities.

Gensler reasoned that most tokens worked according to investment contracts, similar to traditional securities. The SEC chief also said at that time traditional securities laws could be applied to these tokens, reducing the urgency for the development of specific crypto regulations.

Despite that, several crypto-related bills introduced in Congress in the past year set the Commodity Futures Trading Commission (CFTC) as the primary regulator for the industry.

Like in the European Union, most future crypto laws will center around consumer protection, by incorporating some aspects of traditional finance, like custody activities.

“New regulatory initiatives are likely to emerge focusing on transparency mandating regular reporting and auditing of reserves, assets, and liabilities across major crypto entities,” Panigirtzoglou added.

Crypto regulation in emerging economies

Other than countries with developed economies, such as the European Union and the U.S., several emerging countries have also moved to design their regulatory frameworks.

Some countries in Africa, with their rapidly growing tech industry, have implemented guidelines for the crypto industry.

In South Africa, every crypto platform must obtain a license to operate in the country starting in July 2023. Kenya plans to implement a 20 percent tax for every crypto transaction. Meanwhile, Nigeria bans its domestic banks from processing any crypto transaction.

The International Monetary Fund (IMF) said only a handful of countries in the region had implemented sufficient crypto regulations. It urges other African countries to follow suit.

In Latin America, several countries have adopted cryptocurrencies in their daily lives. El Salvador, for instance, legalized Bitcoin as one of its legal tenders.

Despite that, analysts argued that most Latin American countries are underprepared to deal with crypto-related crimes due to “flimsy” regulatory frameworks.