Cryptocurrencies, is it already too late to save them?

Cryptocurrencies, is it already too late to save them?


Few people were prepared for the dramatic collapse of cryptocurrency exchange Ftx on Nov. 11. The company's bankruptcy has prevented hundreds of thousands of customers from accessing their funds, and its knock-on effects have pulverized billions of dollars from the market, as well as cast doubt on the integrity of other cryptocurrency companies.

FTX's deep industry roots have in recent days prompted many companies (including cryptocurrency lending firms Genesis and BlockFi) to rush to calculate their financial exposure, in fear of being dragged down by the crash. Others, however, saw the crisis as an opportunity to develop plans to prevent further infections. “We actually think this is a great time to clean up,” said Changpeng Zhao, CEO of Binance, during a Q&A session hosted on Twitter Spaces last week. “The weak projects are gone and the industry is much healthier.”

Zhao, who calls himself Cz, says he has a plan to deal with the aftermath of FTX's bankruptcy and rebuild confidence in the industry. With the demise of one of its major competitors, Binance's role as the world's largest cryptocurrency exchange has become even more influential. In a series of tweets starting on Nov. 8, Cz announced that Binance will transparently publish a “proof of its reserves” to demonstrate that it has enough cash on hand to fund its customers' withdrawals, and launch a fund recovery to help support worthwhile projects in distress.

On November 15, then, Cz published a post on the Binance blog in which he outlined the best practices for exchanges, which can be summarized in: don't risk, don't borrow and don't cheat. “We cannot allow some bad actors to tarnish the reputation of this industry when it is still in its infancy,” the post reads.

Last week, many other cryptocurrency exchanges followed Binance's lead. Bitfinex,, Huobi, Okx and Kucoin have released or promised to release evidence of their reserves. Some, such as Kraken and Coinbase, have pointed out that they have been publishing their accounts for some time now. Virtually all exchanges have pledged to support the Cz recovery fund or have promised further investments in startups in the sector.

The atmosphere on the exchanges is hushed but optimistic. The companies hope that increased transparency will allow them to continue to attract newcomers to the cryptocurrency industry, while limiting the risk of being accused of Ftx-like account management.

” It was a serious setback for the cryptocurrency industry – explains Blair Halliday, general manager for the UK of Kraken, an exchange that currently handles cryptocurrency transactions of 600 million dollars daily – but we believe that reasonable measures at the industry level , such as evidence-of-reserve audits, will be a crucial starting point in regaining lost trust in the ecosystem.” Similarly, according to Paolo Aroino, head of technology at Bitfinex (which manages $100 million of daily trades), says that only exchanges with a history of responsible governance will survive, and “the cryptocurrency industry will emerge strengthened” from the current difficult period.

However, some industry leaders believe that the collapse of Ftx should be seen as an opportunity for a deeper re-evaluation and a return to the founding principle of the cryptocurrency movement: decentralization.

" It is a great learning moment for the sector – explains Hayden Adams, creator of UniSwap, the largest decentralized exchange (Dex) in the world -. The fact that [the founder of Ftx Sam Bankman-Fried, nda ] had the chance to do [what he did, ed. ] demonstrates that he was building a centralized product that he had full control over.”

Unlike traditional exchanges – which c They allow you to exchange fiat money for cryptocurrencies and hold assets on behalf of clients – Dexes are never in control of client funds and transactions are done on a peer-to-peer basis. According to Adams, this decentralized model eliminates the intermediation risk that has contributed to FTX's woes.

From a user experience perspective, UniSwap is still a work in progress: " If we were to compare ourselves to the internet, we are still in the dial-up era,” adds Adams, who however is convinced that over time, Dexes will supplant exchanges like Binance as the go-to vehicles for cryptocurrency trading.

None of the measures that mainstream cryptocurrency companies are putting in place will they be able to stave off the period of heightened regulatory scrutiny that is predicted to be upon us.

Efforts to regulate cryptocurrency companies have moved too slowly so far, partly due to because of the complexity of the technology underpinning the industry, says Charley Cooper, former chief operating officer of the Commodity Futures Trading Commission (CFTC), the US government agency that regulates the financial derivatives market. Globally, though, the scale of FTX's bankruptcy is likely to prompt regulators to take action.

Some people have pointed out that in traditional finance, the collapses of high-profile companies have occurred time and time again, and which therefore could provide a useful precedent for the regulation of cryptocurrencies. Justin Sun, founder of the Tron network and member of the advisory board of Huobi Global, points out that generally the crises of financial institutions have been followed by " greater regulation and controls [which, ed. ] have served to strengthen the sector - and which - almost surely the virtual assets sector will follow the same path".

In recent years, the European Union (EU) has been working on a new set of laws, known as Markets in crypto assets (MiCa), to be applied to cryptocurrency organizations and designed to protect consumer funds and financial stability. The details of the legislative package have been finalized and will be voted on in February 2023.

If passed, the MiCa will prevent cryptocurrency firms from using accounting tricks that blur the line between their own funds and those of their clients, a practice that apparently played a significant role in the failure of Ftx. " If the MiCa had already been in place, [the collapse of Ftx, ed.] would not have happened in that way - says Stefan Berger, the German deputy of the European Parliament who is leading the efforts for the new legislation -. The case of Ftx it's the 'Lehman Brothers moment' for cryptocurrencies. What the industry needs now is trust, and clear rules and regulatory clarity are needed to build trust.”

Meanwhile, in the US the President Joe Biden's administration outlined a plan in September to regulate the cryptocurrency industry for the first time. The new US regulatory framework aims to crack down on fraud and ensure financial stability, while leaving enough leeway for innovation and entrepreneurship. The latter, however, is a difficult balance to strike, and questions remain about which regulatory body should take the lead, the Securities and Exchange Commission or the CFTC.

Cryptocurrency community is divided on the merits of more regulation: People who are attracted to cryptocurrencies for their role as a barrier against government meddling will flinch at the prospect of stricter regulations, while others are convinced of the fact that companies in the sector need rules to create stable platforms and provide consumers with the protections they deserve.

Ftx founder Bankman-Fried has explicitly supported the need for stricter regulation and in the States United backed a yet-to-be-enacted bill that could impose tougher restrictions on Dexes, among other things.

But a recent Vox article questioned Bankman-Fried's confidence in the regulation of the sector: " Fuck the regulators – he wrote in a private exchange with a journalist on Twitter -: they make everything worse ". Perhaps regretting his frankness, Bankman-Fried then retracted his comments, highlighting how some regulators had "deeply affected him". Regardless of his real beliefs, however, it seems that the founder of Ftx in a roundabout way, will still end up playing a central role in the transformation of the regulatory landscape. " Ironically, Sam's quest for more aggressive government regulation of the cryptocurrency industry could be successful – explains William Quigley, co-founder of the stablecoin Tether –, albeit for the wrong reasons ".

This article originally appeared on UK.

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