The swift collapse of the giant digital-asset exchange FTX earlier this month sent a contagion through the crypto industry. It not only caused substantial financial distress to companies and individuals exposed to FTX, but cast a dark shadow over crypto’s aspirations to upend traditional currency.
To get a better sense of the current market turmoil, we spoke with several Seattle-area crypto venture capitalists and founders about their take on the situation and what it means for their business.
FTX, which recently filed for bankruptcy, set off a wave of industry tumult. Crypto lender BlockFi is reportedly set to file for bankruptcy within the coming days, while the brokerage Genesis is still seeking a buyer. They are joining a growing list of failed crypto projects this year, including Luna and Voyager Digital.
Venture capitalists deployed $4.44 billion in crypto startups in the third quarter of the year, Bloomberg reported, down 37% from the same period last year. That is a major drop from the first quarter of the year, when startup investors set a record by deploying $8.83 billion into crypto and blockchain companies.
Seattle is home to around 20 crypto-related startups. Four of those companies are featured on the GeekWire 200, our list of the top privately held companies in the Pacific Northwest. The index includes crypto cashback app company StormX, carbon removal marketplace Nori, crypto physical retailer Coinme and fintech platform Sila.
Seattle’s Bloccelerate, a blockchain-focused investment firm, landed $20 million as part of a larger fund in September. Gemini, the eleventh largest crypto exchange platform by volume founded by the Winklevoss twins, announced earlier this month that it was hiring more than 100 employees in the Seattle region.
We asked venture capitalists and founders to explain what the FTX meltdown says about the overall crypto market, whether or not crypto will survive, and how their business was affected. Read on for their answers.
Strix Leviathan CEO and co-founder Sadie Raney
What does the fall of FTX say about the broader crypto market? What are some of the short and long-term implications? “The fall of FTX is definitely a wake-up call for the broader crypto market. The fallout from this will be extremely telling as we see which firms are affected and which are not. Short-term implications are that the markets are in paralysis as traders and investors do not know how deep this will go. They don’t know who to trust with their assets, or when that clarity will come.”
Will crypto survive this downturn? Why or why not? “Yes, it will survive, but this has set the industry back quite a bit, potentially even years. Despite what FTX did and the number of firms that are going bankrupt as a result, there are still thousands of valuable projects and solid teams building useful things. There are also a number of traditional firms, banks, asset managers and more starting to run test cases using digital asset platforms (see the JP Morgan and DBS De-Fi trade reported earlier this month).
Despite the sloppiness and stupidity that led to the FTX implosion, there are many protocols out there with a great deal of promise in the long run. We don’t have this technical ecosystem figured out yet, it is still in its infancy and needs a lot of nurturing and growth, but once it matures, these assets will thrive.”
How has the downturn, both in crypto and in the broader economy, affected your business? “The downturn largely hasn’t affected us other than seeing some investors slower to enter the market than previous months. Our strategy takes into account these types of market cycles and this isn’t the first time we have seen the crypto markets drop. We have spent the past few weeks really digging into all of our risk and operational systems. The sad truth is that the actions of FTX have led to rampant speculation and a loss of trust among market participants and counter-parties. It will take time to recover from that fear and mistrust, not to mention the loss of assets impacting hundreds of thousands of FTX users.”
TF Labs and Niftmint CEO and founder Jonathan G. Blanco
What does the fall of FTX say about the broader crypto market? What are some of the short and long-term implications? “There is no doubt that FTX has been a trainwreck and has put the crypto market in a negative light, but I think it’s important to note a few things.
- Crypto technology did not fail.
- Bitcoin did not fail.
- Immense fraud took place by an individual who until recently was seen as the poster boy for crypto to those not in the crypto industry.
This person raised capital from the top VCs, had access to top officials in government, and rubbed shoulders with top athletes who endorsed his company. This is a high outlier situation that should not be reflective of the broader crypto market considering when you have the corporate restructuring expert, John Ray, who worked on Enron bankruptcy, say: “Never in my career have I seen such a complete failure of corporate controls.”
Short-term — those on the fence with crypto will stay on the fence or back away. Those in crypto have deepened their convictions for decentralization, infrastructure, and regulatory guidance, not necessarily regulation.
Long-term — core infrastructure for crypto money, crypto tech, blockchain record management, and Web3/NFT commerce outlast any market down cycle as the utility is better than what is offered by incumbent systems. Bitcoin continues to prove why it’s a great store of value.”
Will crypto survive this downturn? Why or why not? “Yes, crypto has proven to be incredibly resilient, and some may even argue anti-fragile. Bitcoin keeping a price of around $16,000 during the greatest blunder in the crypto industry since Mt. Gox shows there is still conviction for the currency and any likely decrease in Bitcoin from here will be due to broader-macro financial markets and not crypto-specific.
I see Bitcoin as a commodity and most cryptocurrencies as a security, considering many of them were used to raise funds for the protocols they support. Cryptocurrencies will also survive, but as in all industries, it will be survival of the fittest regarding use cases, customers, innovation and overall utility.
Crypto technology will never go away. We are at the beginning phases of crypto technology being better than the incumbent’s technology. What currently is missing is distribution and access. For example: Bitcoin Lightning Network is better payment technology than SWIFT. NFTs are better content files than JPEGs and PNGs. Crypto prices will not deter crypto technology advances.”
How has the downturn, both in crypto and in the broader economy, affected your business? “As a crypto founder who has experienced past crypto winters, I have been building Niftmint from the beginning with winter in mind. At Niftmint, we have built NFT commerce infrastructure for brands so they can mint, sell and custody NFTs on their existing e-commerce while abstracting crypto and crypto-wallets.
Our customers and sales pipeline of brands has thankfully been undeterred by the FTX situation as they do not see NFTs as a cryptocurrency but rather as digital product offerings for goods, loyalty, and experiences. NFTs are simply the evolution of digital content and digital products. This is why you see brands like Starbucks and Nike sticking with their plans for NFTs.
We have seen the most change from VCs who had taken a few steps into crypto during the pandemic and recent bull run, now distancing themselves from the vertical. Over the last two weeks, we received four ‘pass emails’ from non-crypto VCs mentioning FTX and the current environment as their reason for the pass.
In contrast, crypto VCs have remained strong in their conviction to invest in Web3 and crypto startups. We have accelerated conversations with several crypto VCs and have had cold outreaches from crypto VCs. We expect to close our seed round by the end of the year.”
Bloccelerate CEO and General Partner Kate Mitselmakher
What does the fall of FTX say about the broader crypto market? What are some of the short and long-term implications? “For those of use who have been working hard in bringing credibility to Web3 for years, the FTX fallout is absolutely infuriating. FTX is a centralized exchange. It lacked transparency, accountability and auditability — everything blockchain stands for. Because FTX is a centralized private company, its data or assets are ‘not on chain,’ and therefore, neither the users, nor investors had real-time visibility into the health of the balance sheet, fund flows, controls, etc. With that said, VCs had the right to request the board, but for one reason or another, they did not. That’s how we ended up with a $32 billion private company with no checks and balances to oversee the activities of Sam Bankman-Fried.
Based on the FTX incident, it would be easy to conclude that the rest of the crypto market is just ‘smoke and mirrors’ (as Elizabeth Warren concluded recently). However, this would be akin to concluding that the internet is just for porn and illicit activity, in its early days. Yes, there are bad actors in crypto. And yes, there will be more fallouts. And yes, in the short term, everyone will be guilty by association. But this too shall pass.”
Will crypto survive this downturn? Why or why not? “If you look at the actual data, the builders who join the Web3 space don’t quit. In fact, we are already seeing new ‘proof of reserves’ projects that are coming to markets. DeFi projects continue to work, as intended. While it is too early to tell what the exact contagion is, I am confident that in the long term, the space will emerge stronger — with more controls, clarity, better due diligence, and better checks and balances.”
How has the downturn, both in crypto and in the broader economy, affected your business? “Bloccelerate does not have any exposure to FTX, nor do we have exposure to any FTX affiliated companies, which include Alameda Research, Solana, Serum, Oxygen, and Maps.me, Fida, among others.
Bloccelerate’s thesis has always focused on bringing transparency, auditability, and accountability into Web3. For that reason, we made investments in compliance, security & audit, treasury management, enterprise adoption of blockchain, and DeFi.”
Stack CEO and co-founder Will Rush
What does the fall of FTX say about the broader crypto market? What are some of the short and long-term implications? “New technology presents opportunity for nefarious activity. We forget that scam websites and sketchy strangers in chat rooms existed way before Norton Antivirus and Chris Hansen. Only when bad actors successfully exploit technology are we reminded that we need someone to regulate it. In the case of FTX everyone points to decentralization as the solution, but few understand that decentralization doesn’t really exist. You on-ramp money from a traditional financial account to your cold storage wallet or access a blockchain through a private companies user interface.
Unfortunately, more Sam Bankman-Frieds will exist. In my opinion, the solution is to create a modern way to regulate blockchain technology that doesn’t stifle its value but makes it more safe. Nothing will ever be 100% safe. Especially a financial product where bad actors stand to benefit the most from exploiting the system.”
Will crypto survive this downturn? Why or why not? “I don’t think it’s even a question. I have never seen more talented people building in one place in my career. Innovators accumulate in the blast zone. This will only create more opportunity for new, better blockchain uses.”
How has the downturn, both in crypto and in the broader economy, affected your business? “It will definitely impact us at Stack. Crypto as a brand name is hurting for good reason. There is a healthy group of Web3 builders that are disgusted by what happened at FTX but also motivated to see a brighter future. Our team sees this as an opportunity to be louder than ever with some of the decisions we made before this event and to emphasize education.”
Stably CEO and co-founder Kory Hoang
What does the fall of FTX say about the broader crypto market? What are some of the short and long-term implications? “With long-term implications, there’s definitely going to be more regulatory enforcement that’s going to come as a result. Congress is working on a stable coin legislation. Companies like FTX that have blown up because of bad practices like misappropriating user funds. They’re going to become a highlight for the politicians and regulators when talking about why they should be regulating crypto.
In the negative sense, that could be bad because it doesn’t paint a really good picture of everybody in the crypto industry. Not everyone in this space are crooked people. However, the regulation that might come about as a result could affect everyone very adversely if the laws are not properly drafted and implemented.
On the plus side, a lot of people are realizing that centralized exchanges have significant custody risk. In my circle alone, the person with the least damage from FTX lost $80,000, and the person with the most damage lost $10 million. It hurt a lot of people.
People are going to start shifting toward decentralized exchanges in order to trade crypto and digital assets. Decentralized exchanges don’t have similar custody risks as central exchanges. They certainly have other risks, of course. Now the real question is, how do people on-ramp from fiat into stable coin more efficiently? Historically, they’ve done it through centralized exchanges. But now that these exchanges are coming into questions due to the FTX collapse, people are looking for better alternatives to go into to convert their Fiat into stable coins. I think there’s going to be a boom in that particular industry.”
Will crypto survive this downturn? Why or why not? “Yes, I do believe that crypto will survive this downturn. It is just a temporary bump in the road. There are people out there actually using crypto for real world use cases. I sent money over to my family in Vietnam. I used to remit funds to them via Western Union or Remitly. Now, I just send them stablecoins. The local market for stablecoin and fiat conversion is becoming so efficient over there that I can just send them stablecoins, and they can easily convert that to local currency. The transaction fee that they end up paying to convert a stablecoin to a local fiat in Vietnam is significantly less than going to Western Union.”
How has the downturn, both in crypto and in the broader economy, affected your business? “We raised a $5 million pre-Series A funding round right before the market went down. In terms of cash position, we’re really well positioned for this bear market, as we have runway for almost two years. In terms of our business in general, this downturn has definitely hit our volume as compared to last year. We definitely had a significant amount of volume last year compared to this year. Last year, we had about $1.5 million in revenue. This year, we’re just getting to right about that same amount.”
Bloccelerate COO and General Partner Sam Yilmaz
What does the fall of FTX say about the broader crypto market? What are some of the short and long-term implications? “There has been an evolution of how unsavory individuals have been able to cause a lot of harm. First it was through selling unregistered securities. The origin was innocent, crowdfunding of open source software that would demonstrate an immutable reference that you contributed to and would have access to. It would also allow incentives for anyone that would voluntarily provide services to the network independent of jurisdiction and currency. The value of the service would be paired to the value of the network and service, providing a clear market signal on what people need most.
In practice, the innocent crowdfunding took the name ICO, resonant with IPO. This gave means to sell ill-crafted dreams and take things public. Then the story evolved to “Float and Borrow.” Luna and FTT token were prime examples, of tokens whose value was floated with liquidity at a fraction of market cap and was ‘backing’ USD-denominated loans.
There will be another story. It’s the uncanny side of innovation, new means to do things brought with it new means to deliver services, coordinate complexity as well as fraud. Internet at large or smaller facets like online payments, online signatures, etc., fit the mold of this pattern as well. New means! Good or ill.
In the short term we all suffer because evil like fire cannot exist in void so we all burn — varying in the amount of damage we take — giving it some fuel. In the long-term the potential of the new means is ginormous: self-sovereignty of data, coordination of multi-stakeholder communications and transactions, and easier means for everyone on the planet to add value to a global community. Long term, innovation is here and we move to build more, better each cycle.”
Will crypto survive this downturn? “No doubt. The fire is not out. Before our forest grows again, embers need to cool. This may take another year. Crypto, in the sense of cryptographically secured assets and transactions, is the inevitable direction of human coordination. Value is a human construct, we declare and decide in consensus what an asset is, what an institution is, what their powers are. There is no better means we have found yet that allows trustless, automatable, transparent systems. If you ask, would I rather do this thing trustlessly or not? Would I rather be in consensus with everyone the easier way or the harder way? Would I rather have transparency into this system I am a part of or not? The answer for most is a resounding yes, I like the former, please. It’s a human calling, new means to do what we inherently want will survive any downturn.”
How has the downturn, both in crypto and in the broader economy, affected your business? “The bad: we get a bad rep, VC and investor portfolios hurt, new talent coming to the space to build slows down. The good: we get better valuations, select more easily, work with more sophisticated investors who see the opportunity.”