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Crypto venture capital dries up as investors flee after FTX turmoil

By:

City Editor

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Sam Bankman-Fried
2022 was a traumatic year for the crypto industry. After Terra's implosion in May, the summer saw numerous bankruptcies from seemingly reputable crypto entities due to lacking risk management. Sam Bankman-Fried (SBF) appeared to have a plan to save them all. People heralded him as the "JP Morgan of Crypto" after he made several nine-figure investments to rescue the crypto economy, similar to JP Morgan's early 1900s actions to backstop financial institutions. However, by November 2022, SBF's own companies faced jeopardy. On November 11, 2022, FTX filed for Chapter 11 bankruptcy. Now, almost 18 months later, it seems creditors will be more than compensated.

Investment into cryptocurrency startups collapsed at the end of 2022 as the market was shaken by the implosion of Sam Bankman-Fried’s exchange FTX and a string of high-profile bankruptcies, new research has revealed.

The flow of cash into crypto start-ups fell to $2.5bn in the final three months of 2022 – down 75 per cent on the previous quarter, according to research from investment research firm Pitchbook.

The figures show the scale of the slump in confidence in the sector after VC firms invested $11bn into crypto in the first three months of 2022 at the peak of the frenzy.

Analysts at Pitchbook said that investors had been unnerved by the still unproven “practical benefits of crypto” combined with economic shocks and uncertainty surrounding the regulation of the sector. 

“The collapse of several crypto companies in 2022 serve as a reminder that significant challenges still exist in the space. Mainstream adoption of crypto is unlikely to occur until better regulations and guidelines are in place,” said Robert Le Senior Analyst, Emerging Technology at Pitchbook. “The lack of clear regulation is a major concern for the industry and is seen as a limiting factor.”

Regulators globally have made steps towards drawing up rules for the sector in the past six months, with the EU introducing comprehensive legislative plans in the Markets in Crypto-Assets (MiCA) proposal. 

The Treasury in the UK is also set to grant fresh powers to regulators in the UK to allow them to draw up specific rules to clampdown on crypto firms. 

Pitchbook said that 2023 could now represent a “policy inflection point” in the industry and dictate investors’ attitude toward crypto in the longer term. 

“We expect financial regulators and central banks around the world to expand their focus to crypto assets and to accelerate their work in writing new rules to help prevent an FTX-type collapse in the future,” Le added.