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ARK Invest says FTX collapse 'could delay institutional crypto adoption by years'

Cathie Wood’s investment management firm is among DeFi loyalists warning of the domino effect failed cryptocurrency exchange FTX may have on the industry.

ARK Invest said Tuesday the downfall of Sam Bankman-Fried’s once-lauded company has dramatically impacted crypto’s reputation and may be a major setback in progress towards broader acceptance while ushering in overly restrictive regulatory action.

“In our view, FTX’s insolvency is one of the most damaging events in crypto history,” ARK said in a newsletter authored by Director of Research Frank Downing and analyst Yassine Elmandjra. “It could delay institutional crypto adoption by years and perhaps give regulators license to take draconian measures.”

ARK Invest is the fourth largest shareholder of Coinbase (COIN), with more than 7.7 million shares or 4.3% stake in the publicly-traded crypto exchange as of Sept. 30, according to Bloomberg data. The firm also doubled down on the position as turmoil in the crypto space unfolded last week.

Coinbase said it had minimal exposure to FTX, but the extent of the contagion remains unclear.

MIAMI, FLORIDA - APRIL 7: Cathie Wood, chief executive officer and chief investment officer, Ark Invest, gestures as she speaks during the Bitcoin 2022 Conference at Miami Beach Convention Center on April 7, 2022 in Miami, Florida. The world's largest bitcoin conference runs from April 6-9, expecting over 30,000 people in attendance and over 7 million live stream viewers worldwide.(Photo by Marco Bello/Getty Images)
MIAMI, FLORIDA - APRIL 7: Cathie Wood, founder and CEO, Ark Invest, speaks during the Bitcoin 2022 Conference on April 7, 2022 in Miami, Florida. (Photo by Marco Bello/Getty Images)

In any case, institutional investors have been warming up to the space over the past few years. A recent survey by Fidelity found that 74% of surveyed institutions reported plans to buy digital assets.

A lack of legislation, however, has kept cryptoworld in a regulatory gray area. And now there is a concern that the FTX crisis may motivate federal watchdogs to overcompensate.

“The implosion of FTX must be a wake up call for Congress and financial regulators to hold this industry and its executives accountable,” Senator Elizabeth Warren said in a tweet Friday, urging stronger rules and enforcement. “Too much of the crypto industry is smoke and mirrors.”

ARK pointed to a response by Coinbase CEO Brian Armstrong to Warren’s call.

"The problem is that the SEC failed to create regulatory clarity here in the US, so many American investors (and 95% of trading activity) went offshore," Armstrong said on Twitter last week.

Ripple effects are already showing across the space. BlockFi, a digital-asset lender that received a bailout from FTX earlier this year, suspended customer withdrawals. Voyager is ending a deal to sell itself to FTX and seeking new bidders, and Genesis said $175 million in funds were locked in at the collapsed exchange.

Wood and ARK, which earlier this year set a $1 million price target on Bitcoin by 2023, remain crypto bulls despite recent events. The firm also said silver linings of FTX's demise were that Bitcoin and Ethereum "have not skipped a beat," and the crypto market is punishing centralized entities that lack transparency, pushing the ecosystem toward more decentralization and transparency.

“ARK’s conviction in the long-term promise of public blockchains across money, finance, and the internet is not wavering,” the firm said. “While the crypto asset market could labor under selling pressure and liquidity crunches in the short term, we believe this crisis is purging bad actors and will enhance the health of the crypto ecosystem with more transparency and decentralization in the longer term.”

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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