The cryptocurrency industry is counting the cost of the FTX carnage. Contagion from the collapse of the second biggest crypto exchange continues to ripple out, with crypto lender BlockFi filing for bankruptcy just last week.
Markets have been hit, investors have lost out, trust has been dented, and the very concept of cryptocurrency faces a battle to restore faith.
I’m an optimist. Instead of wallowing in the FTX carnage and disaster, I prefer to see this as a long-overdue lesson in the need for we in the crypto space to do better.
FTX Carnage Begins
On November 8, FTX ran into liquidity issues due to a run on deposits sparked by reports of questionable transactions with Alameda Research, a related company.
Despite attempts to trade out of the multi-billion-dollar hole and sale discussions with Binance, FTX filed for Chapter 11 bankruptcy protection just days later. This was despite founder and chief executive Sam Bankman-Fried repeatedly tweeting that FTX was ‘fine’.
John Jay Ray III, a veteran of the Enron collapse, was appointed to oversee the FTX bankruptcy process. He quickly described it as the worst corporate failure he had ever seen.
In court documents about the FTX carnage, he pointed to a ‘complete failure of corporate control’ and ‘unacceptable management practices’. These include accessing sensitive data with unsecured email. He also labelled FTX’s financial information as deeply untrustworthy.
His court filing spoke of ‘compromised systems’ and ‘faulty regulatory oversight’, criticising the concentration of control in a small group of ‘inexperienced, unsophisticated and potentially compromised individuals’. He called the FTX carnage ‘unprecedented’.
Remember, he is talking about what was, until just a few weeks ago, the second-largest cryptocurrency exchange in the world.
FTX’s debts run into billions of dollars, with $3.1 billion reportedly owed to the top 50 creditors alone.
The Fallout
FTX is by no means the only cryptocurrency firm to get into trouble. This year, in a matter of months, we witnessed the collapse of Celsius, Three Arrows Capital, Voyager, Vauld, and Terra, among others.
What makes the FTX carnage so notable is its impact on the rest of the industry and beyond. Bitcoin hit a two-year low in late November, which analysts blamed on FTX, with many other assets also losing value.
Experts say the collapse contributed significantly to the $1.4 trillion value loss on the cryptocurrency markets this year. Other effects included Genesis Global Capital suspending withdrawals, Gemini saying withdrawals from its Earn product may be delayed, the Bored Ape Yacht Club NFT floor price falling by several percentage points in just days, and BlockFi filing for bankruptcy.
While the industry has felt the financial pain of the FTX contagion, there is another facet.
The alarming fall from grace of the world’s number two crypto exchange attracted global headlines in the mainstream media, outlets that wouldn’t usually touch cryptocurrency stories. The allegations about mismanagement and corporate governance failure proved too juicy.
This has damaged trust in cryptocurrency potential among the very people many of us have been working hard to educate. If crypto is to grow and gain wider acceptance and adoption, it needs people to have faith in it.
That faith lies in tatters among the FTX carnage.
The Good News
I estimate, conservatively, that it will take 18-24 months to win back some of that trust. That sounds like bad news, but the FTX collapse could actually be good for crypto, both in reality and in terms of perception.
We now have a chance to learn from the mistakes, demonstrate publicly the steps we have taken to protect investors and consumers, and act quickly to restore the trust that has been dented, if not broken, by FTX.
Since launching my crypto community, Moni Talks, I have been vocal about the need for balanced, enforceable regulation explicitly designed for crypto. Since the FTX collapse, I have repeatedly spoken out on this topic, and I will do again on Thursday when I address the Cryptoassets Regulation and Compliance 2022 conference in London.
I will join the panel discussing Shaping Future Regulation to Increase Transparency, Access, and Protection; the timing couldn’t be better.
Cryptocurrency Exchanges
Perhaps the biggest question from the FTX carnage is, ‘what now for crypto exchanges?’, especially CEXs (centralised exchanges).
There’s no doubt they face a hard time. Revenues are down, trust issues mean more people are storing assets offline, and regulation is about to be stepped up. Revising operations to comply with, frankly, quite reasonable and expedient regulation will be a challenge for some longstanding CEXs…
CEXs have held a prominent role in crypto, but they now face stepping backward as alternatives gain favour thanks to the FTX carnage.
We are already seeing increasing numbers of institutional investors looking to DEX (decentralised exchange) trading. Gotbit CEO Alex Andryunin has been quoted as saying his client’s DEX-based profits jumped by 50% from September to November.
This suggests we are not witnessing the death of crypto, but a changing tide. Investors still want to trade digital assets, but are moving to DEX as a ‘safer’ alternative to CEX.
Despite this, some of the big names will survive. However, I predict some will fail in the coming weeks, and Binance will emerge with an even greater stranglehold on this sector.
What we will move into now is a period of consolidation, which I believe is long overdue. For too long, the industry has been plagued by ill-conceived projects and tokens with little or no use cases that have made a big noise and then disappeared. This damages the reputation of cryptocurrency, especially when investors have their fingers burned.
We will also see cryptocurrency exchange platforms subjected to greater scrutiny, from governments, regulators, investors, and consumers. For those with solid liquidity and transparent, solid management, their market share can be cemented and grown. For those without strong balance sheets and the sort of corporate governance now being spoken about at FTX, the writing is on the wall.
We could end up with fewer than a dozen CEXs, but they will be well-run, liquid, and competitive.
Any centralised exchange which wants to be among the survivors needs to learn the lessons. FTX may have been wildly successful in a short period, but it burnt out in spectacular style. Exchanges that want to regain consumer trust and ensure longevity need to become more transparent and more professional in how they are run.
In the wake of the FTX carnage, we all need to be better and more trustworthy in this industry.
The Alternative
Centralised exchanges have had the lion’s share of the market, but more people are becoming aware of the issues with the centralised finance (CeFi) approach. This is an opportunity for DEXs and will, no doubt, see more investment in decentralised finance (DeFi) protocols from the CEX big names.
However, to take advantage, DEX offerings need to improve for retail traders. User experience needs to be enhanced and the convenient tools consumers have enjoyed at CEX rivals, like limit orders, need to be integrated.
DEXs have an opportunity here, but it relies on education – ensuring consumers know how to use the platforms – and improved UX to keep them there. Otherwise, we will see people dip their toes in DeFi exchanges, find them too hard to manage, and head back to CEX platforms.
A Hybrid
The best outcome would take elements of both and bring consumers a usable product in which they can have faith.
If CEXs are no longer trusted and DEXs don’t feel accessible or useable, what happens? People might turn away from cryptocurrency (or, at least, decide not to join in), and the market shrinks or fails to grow.
In the wake of the FTX carnage, investors want assurances and transparency. They will choose to trade on platforms that are open and frank, clear about their liquidity, and honest about their corporate governance. DeFi can give this transparency, but DEXs are not user-friendly.
Combine this aspect of DEX platforms with the UX many enjoy at popular CEXs and we could have a road map for the future of crypto trading.
We also need to see centralised and decentralised players work together to devise concentrated liquidity pool for DeFi platforms to draw from.
Learn Lessons from the FTX Carnage
The collapse of FTX has taught investors not to trust exchanges that lack transparency. Good.
This will lead to an increasing number trusting cold storage instead of exchanges, but also puts a marker down. From now on, cryptocurrency exchanges need to be transparent about liquidity, corporate structure, and corporate governance.
I do not believe that the failure of FTX, and the other firms we lost earlier in the year, suggest that cryptocurrency has no future. I see them as signs that the industry is maturing and recognising that, especially in finance, it is crucial to be transparent, honest, and well-managed.
Those who are not, or cannot meet this standard, will fall by the wayside, and will not be mourned. Those who embrace regulation, openness, and strong governance will be the future of money and finance.
We thought the days of crypto being like the ‘wild west’ were long behind us, but that is not the case. There are, sadly, still too many projects which, while perhaps well-intentioned, are badly managed, less than transparent about their assets and structure, and will collapse.
Emerging from the FTX Carnage
While there can never be any guarantees in finance – we have seen many ‘traditional’ institutions implode due to dishonesty and poor management – there are ways to reduce the frequency and limit the harm to consumers and the markets.
Clear, unambiguous, enforceable regulation designed specifically for the cryptocurrency industry is long overdue. Many regulators have tried to apply existing financial regulations or bend them into a ‘crypto shape’. And we have seen the results.
Those of us in the industry who see crypto as the future of finance must engage with regulators to help write rules which will clean up the cryptocurrency space, make it safer for investors and consumers, and make a place people can have trust and faith.
We must commit ourselves to transparency and the highest standards of corporate governance. If we don’t, the trust will never return, and the crypto industry will stagnate.
