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.
We spoke to several founders of crypto venture capital firms in Seattle about the market and their views on it.
FTX filed recently for bankruptcy and set off a tsunami of turmoil in the sector. BlockFi, a crypto lender, is expected to file bankruptcy in the next few days. Genesis, meanwhile is still looking for a buyer. They are joining a growing list of failed crypto projects this year, including Luna and Voyager Digital.
Bloomberg reports that venture capitalists invested $4.44 billion to crypto startups during the third quarter, down 37% compared with the previous 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.
There are around 20 cryptocurrency-related startups in Seattle. Four companies from this group are listed on GeekWire 200. This is our index of top private 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.
While notable Seattle crypto startups like ZenLedger (peer), Spice AI, and Stack have raised $30 million, this is a record year.
Bloccelerate in Seattle, which is a blockchain-focused investing firm, has secured $20 million to be part of a larger fund. 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.
Venture capitalists and founders were asked to discuss the FTX crash and what it meant for crypto, the possibility of crypto surviving, as well as how the impact on their businesses. For their responses, read on.
Sadie Raney, Strix Leviathan CEO, is also co-founder.
What is the impact of FTX’s fall on the larger crypto market overall? How will this affect the crypto market in the long and short-term? The fall of FTX was a clear signal for crypto markets in general. As we find out which companies are being affected by this, the fallout will be very telling. The markets appear to be in paralysis right now, as investors and traders don’t know the depths of this. They aren’t sure who they can trust with their assets or when this clarity will arrive.”
Can crypto survive the downturn? Is it possible? “Yes, it will survive, but this has set the industry back quite a bit, potentially even years. Despite all that FTX has done and how many companies are now going bankrupt, there is still thousands of projects worth doing and teams working on useful stuff. Traditional banks and asset managers, as well as traditional businesses, are now using digital assets platforms to test their cases (see earlier reports by JP Morgan, DBS De-Fi, and others).
Despite all the sloppiness, stupidity and mismanagement that caused the FTX collapse, there are many promising protocols. 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.”
What has happened to your business due to the economic downturn? “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. These past weeks have been spent analyzing all aspects of our operational and risk 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. The fear and mistrust that FTX has created will need to be overcome over time, as well as the losses of assets which have a negative impact on hundreds of thousands.
Jonathan G. Blanco is the CEO of TF Labs, Niftmint and Niftmint.
What is the impact of FTX’s fall on the larger crypto market overall? How will this affect the crypto market in the long and short-term? “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.
- It did not work.
- 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 individual raised capital from the most powerful VCs, was able to access top government officials, and rubbed shoulders in high-profile endorsement deals with celebrities. 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. Crypto-beards have reaffirmed their belief in decentralization, infrastructure and regulatory guidance. Not 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 is proving to be a valuable store of value.
Is crypto going to survive this downturn Why or not? Crypto has been incredibly resilient and many may argue even antifragile. Bitcoin keeping a price of around $16,000 during the greatest blunder in the crypto industry since Mt. Gox has shown that the cryptocurrency is still trusted. The likely decline in Bitcoin’s value from this point will result not only of crypto-specific but also macro financial markets.
Bitcoin is a commodity to me, and most cryptocurrency a security because many were raised funds for protocols that 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.
The future of crypto technology is not yet here. Crypto technology is in its early stages and will be better than incumbent technology. Distribution and accessibility are currently lacking. The Bitcoin Lightning Network, for example, is a better payment system than SWIFT. NFTs can store more content than JPEGs, PNGs, and PNGs. The rise of crypto technology will not be impeded by high prices.
Is your company affected by the crypto- and broader economic downturn? “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 clients and the sales pipeline of brands have been remarkably unaffected by the FTX scenario. They don’t see NFTs in cryptocurrency, but as digital products offering goods, loyalty and experiences. The NFTs simply represent the evolution and creation of digital content. You can see why brands such as Nike and Starbucks are sticking to their NFT plans.
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.
However, the conviction of crypto VCs to invest in Web3 or crypto startups has remained firm. We have accelerated conversations with several crypto VCs and have had cold outreaches from crypto VCs. “We expect to complete our seed round before the end of this year.”
Bloccelerate CEO & General Partner Kate Mitselmakher
What is the impact of FTX’s fall on the larger crypto market overall? How will this affect the crypto market in the long and short-term? “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 cryptocurrency exchange. It lacked transparency, accountability and auditability — everything blockchain stands for. Because FTX, a centralized private corporation, has its assets or data ‘not on chains’, investors and users have no real-time insight into the state of the balance sheet, fund flows, control, etc. VCs could request the board. But they chose not to. This is how we got a private $32 billion company without any checks and balances that would have been able to monitor the activities of Sam Bankman Fried.
The FTX scandal would lead one to believe that most of the cryptocurrency market is merely smoke and mirrors. Elizabeth Warren made this conclusion recently. But, it would be like saying that the internet’s early days are only used for illegal and porn. It is true that there are criminals in crypto. Yes, more will follow. Yes, there will be more fallouts in the near term. This too will pass.
Is crypto going to survive the downturn? Why or not? The data shows that builders join the Web3 space and don’t stop. We are seeing new proof of reserve projects coming to the markets. As intended, DeFi projects are still working. 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.”
What has happened to your business due to the economic downturn? “Bloccelerate is not exposed to FTX nor does it have any exposure FTX related companies. This includes Alameda Research (Serum, Oxygen and Maps.me), Fida Research (Selerum, Oxygen) among others.
Bloccelerate has been adamant about bringing transparency and auditability to Web3. For that reason, we made investments in compliance, security & audit, treasury management, enterprise adoption of blockchain, and DeFi.”
Will Rush is co-founder of Stack and the CEO.
What is the impact of FTX’s fall on the larger crypto market overall? How will this affect the crypto market in the long and short-term? The new technology opens up the possibility of nefarious activities. Scam websites, shady chat room strangers and other criminal activities existed long before Chris Hansen and Norton Antivirus. It is only when criminals exploit technology that we are reminded we have to oversee it. Decentralization is often cited as the answer to FTX, however few realize it does not exist. It is possible to transfer money from your traditional financial account into your cold storage wallet, or you can access the blockchain via a private company user interface.
It is likely that there will be many more Sam Bankman Frieds. 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. There is no way to be sure that everything will remain 100% secure. Particularly in financial products where the greatest risk is from being exploited by bad actors.
Is crypto going to survive this downturn Why or not? “I do not think that it is even possible. My career has not seen so many talented people in one location. This blast zone hosts innovators. The blast zone will provide more opportunities for better, new blockchain applications.
What has happened to your business due to the economic downturn? It will certainly impact us here at Stack. The brand of Crypto is in serious trouble. Web3 builders who are not only disgusted at the events of FTX but want to look forward with optimism see a group of healthy Web3 builders. We see this opportunity to speak louder and more strongly than ever about some of our decisions before the event, as well as to promote education.
Stably co-founder and CEO Kory Hoop
What is the impact of FTX’s fall on the larger crypto market overall? How will this affect the crypto market in the long and short-term? With long-term consequences, we expect more regulation to follow. Congress is currently working on stable coin legislation. Bad practices such as misappropriation of user funds have led to the collapse of companies like FTX. These companies will be the focus of politicians and regulators as they discuss why crypto should be regulated.
That could make the situation worse, as it does not paint an accurate picture of the entire crypto community. There are not all people in the space who are corrupt. The regulation that may be enacted as a result of the law could adversely affect all if it is not correctly drafted and executed.
Some people realize that central exchanges pose a significant custody risk. I found that the one with the lowest FTX damage suffered $80,000 while the one with the highest loss lost $10,000,000. Many people were affected.
Decentralized exchanges will be more popular in the future to allow people to trade cryptocurrency and other digital assets. There are no similar custody risks with decentralized exchanges to central ones. There are other risks associated with them. The real question here is how can people convert fiat to stable currency more effectively? In the past, this was done through centralized exchanges. These exchanges have been in question since the FTX crash, and people now look for other options to convert Fiat to stable currencies. That particular sector is going to boom, I believe.
Can crypto weather this downturn without losing its value? Why or not? “Yes. I believe crypto will weather this downturn. This is a temporary bump on the road. It is possible to use crypto in practical applications. My family in Vietnam received money I had sent. They used to send money to me via Western Union and Remitly. I send them now stablecoins. Because the local market is so well-developed for fiat and stablecoin conversion, I am able to send them local stablecoins and they will convert it into local currency. They pay a significantly lower transaction fee to convert the stablecoin into a local Vietnamese fiat.
What has happened to your business due to the economic downturn? We raised $5 million in pre-Series B funding right before the market crashed. Our cash position means that we are very well prepared for this bear market. We have runway for nearly two years. This downturn in volume has had a significant impact on our overall business. Last year, we had significantly more volume than this year. We had approximately $1.5 million revenue last year. We’re only getting close to that amount this year.
Bloccelerate General Partner and COO Sam Yilmaz
What is the impact of FTX’s fall on the larger crypto market overall? How will this affect the crypto market in the long and short-term? There has been an evolution in the ways that unscrupulous individuals are able to do a lot harm. It started by selling non-registered 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. The network would offer incentives to anyone who would provide services, regardless of currency or jurisdiction. It would pair the price of the service with the value of both the network and the service to provide a market indicator on the most needed services.
The innocent crowdfunding was referred to as ICO in practice. This is a similarity with IPO. The public could then buy poorly-crafted ideas and make them known. The story was renamed “Float & 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.
It will all be different. Innovation is the surprising side. It brings new ways of doing things that allow you to coordinate complex tasks and deliver services. This pattern also applies to Internet in its smaller and larger facets, such as online payments or signatures online, etc. You have new means. Good or bad.
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. Innovation is here long-term and we are working to make each cycle better.
Is crypto going to survive this downturn “No doubt. “The fire is still burning. The embers must cool down before the forest can grow again. It may take another year. The inevitable direction of human coordination is crypto, which refers to cryptographically protected assets and transactions. Value is a human construct, we declare and decide in consensus what an asset is, what an institution is, what their powers are. We have yet to find a better way that creates trustless, automated, and transparent systems. You can ask yourself: Would I prefer to do it trustlessly? Would I rather be in consensus with everyone the easier way or the harder way? Do I prefer transparency or lack thereof in the system that I’m a member of? For most, the answer is yes. Because it’s human nature, any downturn will not stop us from pursuing our inherent desires.
What has happened to your business due to the economic downturn? The bad: We get a poor reputation, VC portfolios are hurt and new talent is not coming into the area to build. Good: We can get better valuations, choose more easily and work with smarter investors who see the opportunities.