The ripples of FTXs collapse have even reached Cyprus, where it received its EU license and has left an impact on Cyprus’ watchdog, Cyprus Securities and Exchange Commission (CySEC), and regulators globally.

Lael Brainard, Vice Chair of the Federal Reserve stated in a speech she gave at the Bank of England Conference in 2022, “it is important that the foundations for sound regulation of the crypto financial system be established now before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system.” Since the FTX collapse, Cyprus has been in the sights of the global financial system, more specifically within the European Union, for its efforts in regulation.

To give an understanding of the scope of this fraud, according to Time magazine’s Andrew R. Chow, $8 billion worth of investor's money was lost; poof, gone. 

FTX, an abbreviation for “Futures Exchange”, was founded by Sam Bankman-Fried and Zixiao Wang in May 2019. It served as a cryptocurrency exchange platform, rivaling the likes of Binance and Coinbase, two trading platform titans in the crypto world. FTX enabled users to buy, sell, hold, and exchange cryptocurrency. It was endorsed and promoted by athletes and celebrities such as Shaquille O’Neal, Tom Brady and Gisele Bündchen, Kevin O’leary, to name a few, who all promoted the trading platform.

Bankman-Fried spent millions on sponsorships, including deals that renamed the Miami Heat’s stadium to the FTX Arena. It even sponsored a leading esports organization named Team SoloMid (TSM) which had, for a short period, changed its name to TSM FTX.

The red flags pertaining to FTX were initially raised by CoinDesk, a news portal for the crypto world. CoinDesk published a report that unveiled what was happening behind the curtains. It showed that Bankman-Fried’s hedge fund, Alameda Research, had a portfolio loaded with FTX’s token, FTT. 

This raised suspicions that Bankman-Fried was manipulating and inflating the value of FTT. Following this report, numerous large investors started pulling out, spreading uncertainty and fear. Emma Roth, weekend editor at The Verge, explains, “after this came to light, Changpeng “CZ” Zhao, the CEO of the crypto exchange Binance, announced his plans to sell Binance’s FTT holdings, causing panicked investors to withdraw their funds from FTX.”

There were more customer requests for withdrawals than the platform could afford, which, in short, knocked down the dominos that resulted in FTX’s bankruptcy in November 2022. This eventually led to more exchanges and cryptocurrencies going under investigation and, ultimately, filing for bankruptcy.

This event put Cyprus on the map, in an ethically gray ‘light’. Again. In September 2022, FTX announced that it had received approval to operate FTX EU as a Cyprus Investment Firm. “CySEC has said it was not licensed to engage in the direct trading of crypto assets” as noted in a Reuters article.

German MEP, Markus Ferber, stated that it was “concerning that FTX managed to obtain an investment firm license in Cyprus. If [this subsidiary] even remotely behaved like its parent company, this raises major questions in relation to the quality of financial services supervision in Cyprus.” 

Since then, CySEC has suspended FTX’s license, and by the end of 2022, extended the suspension of FTX’s license to operate in the EU. CySEC has tightened its regulatory framework amidst the rise of crypto exchanges, websites, and trading platforms.

In an effort to retain its integrity, CySEC is promoting growth while improving its systems in regulatory compliance. Marios G. Lazarides, Head of Advisory at KPMG in Cyprus, stated that “regulators are seeking to encourage growth and innovation but are still focused on resilience and good conduct.”

Despite embracing blockchain technology and cryptocurrencies, Cyprus must proceed with caution as it navigates the rapidly changing landscape of the crypto world. The country has published a national strategy on the matter and submitted relevant legislation to the parliament, but recent developments have raised concerns about the potential risks involved. 

The controversy surrounding the FTX operating license is just the latest example of the challenges faced by Cyprus in the crypto world. Remember “Neo” the bitcoin bank from years back?

Having said that, the island has also experienced growth in its blockchain and crypto ecosystem, with both the public and private sectors exploring ways to integrate blockchain technology into their operations. Government tenders requesting blockchain technologies serve as a testament to this trend.

Moving forward, the future of crypto in Cyprus seems promising. CZ’s visit to Cyprus alone is a good indicator of that, as well as his interview with University of Nicosia’s CEO, Antonis Polemitis. CZ stated that the purpose of his visit to Cyprus was part of his mission in getting familiar with the “crypto-friendly” countries around the world. 

Have you dabbled with cryptocurrencies? Maybe you’ve included digital assets in your investment portfolio? What are your thoughts on the future of crypto exchanges and the efforts of regulators?