The Economics of Risk and the Future of Cryptocurrency

In November 2022, the world of cryptocurrency hit the news wave as the trading giant, FTX, filed for bankruptcy on Nov. 11. FTX had become a household name, valued at close to $40 billion, and was the third largest exchange platform in the digital currency market. However,  since November, CEO and founder Sam Bankman-Fried has been arrested and charged with eight counts related to fraud, and an $8 billion hole in the company has been unearthed. This collapse has led to worries and predictions regarding the future of the digital currency market. 

As of December, Bitcoin prices had fallen approximately 63% throughout 2022 and 16% in November alone. While many companies and investors remain confident the currencies will quickly bounce back and remain trustable assets, the fall of the company re-sparked debate over the area of policy and finance. 

The world of cryptocurrencies is uncharted territory. As such, looking at the impact of the trading giant and the journey of cryptocurrency throughout 2022 is best understood by outlining its rise, controversies and debates in modern financial history. 

First, a bit about the evolution of money

The role of money has generally been subdivided into three categories: to act as an accepted medium of exchange, have a store of value and serve as a unit of account to price and compare goods and services. Moving from a bartering-centered system, forms of money have constantly morphed from country to country. Paper money was initially printed during the Yuan dynasty, and credit cards entered the scene in the 1950s. Since, modern finances have operated primarily on the use of debit/credit cards and cash.

The financial system underwent its subsequent change with the evolution of the internet and commercial websites, with digital payments becoming more common in the 1970s and 80s. Money now started moving through online intermediaries.

For instance, companies such as Paypal helped move the needle toward online transfers through the creation of third-party payments. Additionally, firms such as Safaricom, which began utilizing cellular sim cards to promote digital transactions, according to MIT Professor Gary Gensler, presented innovations for moving money. 

The introduction of Bitcoin and the rise of cryptocurrency

The first concrete and surviving digital crypto-currency, Bitcoin, comes after a series of primarily failed attempts in the 1980s, 90s and 2000s to apply the idea of cryptographic technology to cash and credit. Cryptography refers to a system of encoding and decoding data back and forth. 

On Halloween 2008, still anonymous, Satoshi Nakatomo sent out an email announcing work on a new electronic cash system. The proposal was technically advanced but conceptually simple: the creation of a new peer-to-peer direct system that would require no third-party intermediary. The email introduced Bitcoin to the world, and while the system has undergone various changes since, most cryptocurrencies today still operate primarily on the same skeletal structure.  

Bitcoin is an electronic currency that runs transactions using a system of public and private keys unique among users, who maintain a certain level of anonymity because transactions need confirmation through these electronic keys. Bitcoins are defined, according to Nakatomo, as a chain of computer-generated digital signatures, free-floating. 

These digital signatures allow a way to record and verify online transactions on a distributed and shared ledger. Digital signatures operate as a sort of “virtual fingertip,” ensuring correct transactions are taking place. 

Later, transactions are given a unique serial number and form a block that comes into contact with blockchain technology to timestamp and adds to the ledger through a process known as mining. Mining operates to ensure scarcity, so only a limited amount of bitcoin, 21 million Bitcoin, are mined each year. 

Additionally, to create a consensus protocol, the communication network only adds and accepts new blocks after proof-of-work, a specific computation that verifies transactions, is established through the computer system. 

Cryptocurrency stands apart from traditional currency due to its distributed ledgers and model. Since Bitcoin, countless other digital currencies have hit the market, including Ethereum, released in 2014, and Tether.

Although initially primarily used in the underground economy and illegal activity, cryptocurrency started boosting value and becoming mainstream. Yet, due to their politically decentralized nature, cryptocurrencies are generally highly volatile and face low scalability. Thus, outside of El Salvador and the Central African Republic, which became the first countries to legalize Bitcoin as legal tender to settle debts, cryptocurrencies are today traded and used as speculative financial assets for consumers and investors. At its peak in 2021, the total crypto market was valued at $2.9 trillion

Current Situation and FTX

So how did FTX enter the scene? The introduction of cryptocurrency helped start its capital market and various trading companies were established for selling, buying and managing the currencies beginning with the industry giant Binance in 2017. Binance was followed in 2019 by the creation of FTX, which quickly established itself as a player in cryptocurrency exchange. FTX created and introduced its denomination of cryptocurrency, or token, known as FTT. The company became the third largest exchange company in the international market, helping bail out several other firms after the crypto-winter price fall in the spring of 2022. 

Co-founded by American Sam Bankman Fried, the FTX entrepreneur became a public figure, frequently appearing in US congressional panels to talk about cryptocurrency.  

FTX worked in coordination with its hedge fund, Alameda Research, but the company’s story began unraveling in November when another cryptocurrency exchange company, Coinbase, released information FTX was performing a series of high-risk trades and loans through their FTTs. Coinbases’ information release led to a decrease in consumer confidence that, fueled by the public statements of other exchange companies, sparked a consumer-run that uncovered several weaknesses and pains in the corporate model. The company did not hold enough reserve resources and after a failed acquisition plan, it filed for bankruptcy. After further investigation, its American CEO was extradited from the Bahamas, then FTX’s less regulatory operations center, on claims of company-wide defrauding; the scandal even rendered many investors unable to withdraw their initial investments. 

Broader developments and debates

FTX’s collapse marked one of the most notable developments in the timeline of cryptocurrency. Following the fall of FTX, many in the financial sector began criticizing the exchange market as an overly centralized environment, with few companies dominating and monopolizing much trade. 

The long-term ramifications on the value of crypto-assets remain fluctuating, but FTX’s first hearings in the US Congressional House Committee have led to talks regarding regulatory policies.  

In the wake of FTX, on Jan. 2, the Federal Reserve and Federal Deposit Insurance issued a joint statement regarding crypto-asset risks on banking organizations. Additionally, Coinbase reached a 100 million dollar settlement with New York regulators after failing to comply with New York’s reporting requirements. FTX’s fall has led to wavering consumer trust and placed a heavier spotlight on the possible weaknesses and effects of the exchange market. 

Furthermore, on Nov. 18-19, the Group of 20 countries, or G20, issued in their leaders’ declaration support for the Financial Stability Board’s proposal for creating an international regulatory framework of crypto activity to promote consistency.  

This has led to increasing talks on regulation programs, including the European Union’s approval of the Markets in Crypto-Assets Regulation Bill (MiCA) in October 2022. MiCA was one of the first international efforts to regulate digital market assets. The bill, which will be brought before the EU Parliament for Voting in early 2023, would require crypto companies to register with national authorities and meet a series of guarantees for investors. 

The fall of FTX came at a time when cryptocurrency had grown extremely prevalent, a recent poll showing as many as 1 in 5 Americans had contact with or held cryptocurrency. Looking forward, investors and regulators must track the international community’s continued response,  determine how to place cryptocurrency in the market and what types of regulations will or should be implemented. 

Despite recent price falls, cryptocurrencies and assets do not seem to be going anywhere anytime soon. In the economic game of risk and expected values, FTX has jump-started discussion on how countries should navigate domestic and international supervision and standards of the digital market.  


Lucia Musacchi
Lucia Musacchi (she/her) is a Sophomore majoring in economics on a pre-law track. An associated editor, she is interested in economic integration, international development, and human rights in Europe and Sub-Saharan Africa. Outside academics, she loves hiking and watching the interesting F1 Ferrari strategies.