Faculty of law blogs / UNIVERSITY OF OXFORD

The Financialization of Crypto: Lessons from FTX and the Crypto Winter of 2022-2023


Time to read

3 Minutes


Douglas W Arner
Kerry Holdings Professor in Law, RGC Senior Fellow in Digital Finance and Sustainable Development, and Associate Director, HKU-Standard-Chartered Foundation FinTech Academy, University of Hong Kong
Ross Buckley
Scientia Professor, and the KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation and Law at UNSW Sydney, Australia
Dirk A Zetzsche
Professor of Law and ADA Chair in Financial Law (Inclusive Finance) at the Faculty of Law, Economics and Finance, University of Luxembourg
Jamieson M Kirkwood
Postdoctoral Fellow, University of Hong Kong

The year 2022 was an annus horribilis for the crypto ecosystem even before the collapse of the FTX group. In just one year, crypto lost about USD 2 trillion in market value. Following the failure of FTX, one of the biggest corporate or financial failures since the 2008 global financial crisis, the urgent need for a global and coordinated approach to crypto regulation has become clear.

The irony inherent in what has come to be called the ‘Crypto Winter’ of 2022-2023 is the fundamental premise of our new paper, The Financialization of Crypto: Lessons from FTX and the Crypto Winter of 2022-2023. Bitcoin, cryptocurrencies and decentralized finance (which for these purposes we refer to collectively by the shorthand ‘crypto’) were presented as an alternative to the failures of traditional finance as demonstrated in centuries of financial crises and culminating in the 2008 Global Financial Crisis. Through a transparent technological framework, crypto was precisely designed to avoid the downsides of traditional finance: conflicts of interest from many powerful intermediaries, information asymmetries, centralization of crucial functions and markets, control by a few large and often interconnected intermediaries, an abundance of poorly informed over-enthusiastic market participants (‘irrational behavior’), as well as agency, operational and financial risks, and of course fraud, manipulation and misconduct. Financial regulation and supervision have evolved over centuries to seek to enhance financial stability, ensure adequate investor, depositor and consumer protection, further market fairness, efficiency and integrity, and steer the financial system towards economic growth, financial inclusion and sustainable development.

We argue that crypto—despite its intention and underlying technological design as decentralized finance—has in less than 15 years evolved to display all of the classic market failures and externalities that characterize traditional finance. Together with the widespread duplication of traditional financial products and services in the crypto ecosystem, we call this evolutionary process the ‘financialization’ of crypto. Where the underlying market failures and externalities as well as economic motivations and objectives of participants mirror traditional finance, so does our proposed solution: the crypto ecosystem, to function properly going forward, requires regulatory and supervisory systems designed to address its market failures and externalities. Similar risks and activities require similar regulatory approaches to support proper market functioning and reduce regulatory arbitrage.

The question going forward is whether crypto can survive the 2022-23 crypto winter. We argue that to survive and thrive, appropriately designed regulation is essential and that such financial regulation must address the range of market failures, externalities and inefficiencies which have arisen in the crypto ecosystem.

The same question—the future of crypto—is currently a major focus of the regulatory agenda. The Financial Stability Board (FSB), International Monetary Fund (IMF) and Bank for International Settlements (BIS) have issued position papers as the Group of 20 considers an internationally coordinated approach. Major jurisdictions are implementing or designing new measures.

We consider FTX and other crypto collapses that collectively are referred to today as the Crypto Winter of 2022-23, and put these into context along with the earlier crises including Mt Gox in 2014 and the ICO bubble of 2017-2019.

We argue that these crises are characterized by what we term the financialization of crypto. This process of financialization has included the rise of Systemically Important Crypto Intermediaries (SICIs) that, contrary to the philosophy of decentralized finance (DeFi), dominate the ecosystem. Due to lack of regulation and transparency, we classify these as forms of ‘shadow finance’, which, in the formal banking sector, was a precipitant of the Global Financial Crisis of 2008. Against the background of financialization and the evolution of SICIs, we present a macro perspective on the crypto industry and argue that crypto, despite its promising and potentially transformative underlying technology, is neither immune nor special with regard to conflicts of interests, information asymmetries, centralisation of crucial functions, interconnections of principal actors, irrational behaviour, criminal conduct, and a wider range of agency, operational and financial risks. It is ironic that any assessment of the major crypto ‘exchanges’—a term we strongly argue should only be used for firms that are appropriately licensed and operating according to well-recognized principles and requirements appropriate for the designation—suggests the crypto industry, rather than being decentralized, is perhaps even more centralized in some aspects than traditional financial markets. At the core of these new centralised financial systems stand a number of non-transparent crypto intermediaries and crypto conglomerates, not dissimilar to those which have often proven problematic in the history of traditional finance.

We distinguish between risks where crypto exhibits features of traditional finance, and those where idiosyncrasies justify bespoke regulation. We then go on to propose a set of regulatory solutions to address the financialization of crypto: (1) licensing and supervision of related conduct of business and appropriate balanced proportional risk-based prudential regulation of intermediaries, (2) disclosure and transparency requirements, (3) segregation and custody rules, (4) market abuse regulation and enforcement, (5) restructuring and resolution legislation, and (6) cross-border harmonization and coordination.

Douglas Arner is the Kerry Holdings Professor of Law of the University of Hong Kong.

Ross Buckley is a Scientia Professor at UNSW Sydney.

Jamieson M Kirkwood is a Postdoctoral Fellow at the University of Hong Kong.

Dirk Zetzsche is a Professor of Law at the University of Luxembourg.


With the support of