FTX: Sunlight is the best disinfectant
Last week FTX, once one of the world’s largest cryptocurrency exchanges, imploded as investors lost trust in the company’s solvency. Cryptocurrency prices fell dramatically in its wake, leaving countless other actors exposed. The full extent of the contagion remains to be seen.
FTX’s problems stem from the solvency crisis that started in June. In hindsight, it is clear that Alamada and FTX were heavily impacted, but these events were covered up by creative accounting, misuse of client funds and public relations.
While dramatic, these types of events have happened before in our industry and are likely to happen again as crypto continues to grow and mature. Whether it was Mt. Gox in 2013 or the ICO bubble of 2018, crypto markets have taken massive hits before. Up to now, they have always rebounded and grown larger and stronger.
Nonetheless, there are lessons to be learned here. We think there are three:
This was not a failure of decentralisation – quite the contrary: FTX was a large, centralised, highly opaque entity whose success was heavily dependent upon the reputation of one charismatic individual. This is the polar opposite of the ideal of a decentralised financial system. In a decentralised world, where individuals control their own funds, protocols mandate transparency, and algorithms enforce trust, an FTX could never happen. Unfortunately, many unregulated, centralised entities may invite scammers, bad actors and even tempt businesses to engage in high-risk activites and operate against their own terms of service - something that we should never expect to continue. This includes, above all, the misuse of client funds.
Now, DeFi can offer several advantages compared to traditional finance, but its unregulated trade-offs must also be considered. These include the presence of countless P&D scams and cyberattacks as well as the lack of KYC checks, AML monitoring and consumer safeguards.
This was not a failure of blockchain technology: Similarly, it is important to point out that FTX’s demise had nothing to do with blockchain technology. In fact, the technology is trustless and works perfectly. New entrants and traditional players across the financial system and in other sectors continue to embrace blockchain as well as decentralised business models and approaches for its clear potential to help renew and revamp legacy infrastructure.
As always, good governance is the key: While we embrace the ideal of decentralised systems, decentralisation alone is not a “one-size-fits-all” solution. We also realise that centralised intermediaries of various kinds – for example, exchanges or crypto banks like ourselves – have a necessary and useful role to play as enablers of a safe, secure and efficient digital asset econony. What separates good from bad actors in the crypto world is the same thing that separates them in the legacy world: good governance, prudence, responsibility and integrity. These are the standards by which investors and others should measure their counterparties in the crypto space.
Having worked hard and diligently to not take any shortcuts in building our business, and having not serviced a single client or carried out a single trade until we were fully vetted and licensed by the relevant authorities (Switzerland and Singapore), we like to think of ourselves as firmly working for the greater good of the industry. The majority of our peers in crypto too.
If there is any silver lining to last week’s event, it is that through this process, the crypto market is ridding itself of bad actors and moves to self-impose higher standards of transparency. It will likely also lead to renewed calls for ever-more stringent regulation. We hope these calls won’t lead to a stifling of the great innovation that the decentralisation ideal embodies. But rather, towards renewed efforts that will merge the power of DeFi together with the trusted elements of CeFi (strong governance, proper KYC/AML measures, risk controls and security) as a realistic yet innovative path forward. Western regulators have an opportunity to safely enable this growth.
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