The collapse of FTX, one of the biggest crypto exchanges, has rocked the digital currency world. Taimur Hyat, COO of PGIM, comments on the developments in the crypto industry.
The former $32 billion trading platform has filed for bankruptcy protection in the US and founder Sam Bankman-Fried has resigned as CEO after learning the company had loaned billions of client funds to its own trading firm, Alameda Research. As a result, late November saw a flood of redemption requests across all platforms as investors braced for a possible spread of the crisis.
Since peaking in 2021, cryptocurrencies have lost over $2 trillion in value and are currently experiencing a dramatic crash. As a result, they are attracting the attention and scrutiny of regulators around the world. Michael Barr, Fed Vice Chairman for Banking Supervision, also said events in crypto markets “have highlighted the risks to investors and consumers that come with new and emerging asset classes. and activities if they are not accompanied by a clear framework”.
This development contrasts sharply with the situation a few months earlier, when crypto enthusiasts were advocating, and in some cases implementing, the inclusion of cryptocurrencies in institutional wallets and 401(k) accounts.
Anyone who is still considering entering the world of cryptocurrencies at a potentially attractive and lower price should consider one thing: the most serious risks of investing in cryptocurrencies are probably yet to come. Investors considering a long-term allocation to cryptocurrencies should be cautious for three main reasons:
1. Lack of a unified regulatory framework
First, the lack of clear and consistent regulation of cryptocurrencies – both within and between countries – creates enormous uncertainty for long-term investors. For example, in the United States, it is still unclear when a cryptocurrency falls under the regulatory framework of a security, subject to SEC regulations, and when it will be classified as an asset or a commodity, like Bitcoin and Ethereum. demanded it. In addition, cryptocurrencies are even completely prohibited in some countries. A stark example is China’s abrupt ban on all cryptocurrency trading and mining in 2021, but it’s far from the only one. Add to that the significant and repeated outages of the infrastructure that enable cryptocurrency mining and trading and this is another area where significant regulatory uncertainties remain. The fallout from the FTX collapse makes one thing clear: self-regulation and transparency are an illusion.
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