FTX Is Dead But No One Can Be Protected From a “Bad Player”
The FTX collapse has once again provoked the crypto skeptics to voice yet another call that Crypto is dead and everyone should give up on their digital assets. However, FTX does not represent the nature of cryptocurrencies as a “whole”. In fact, FTX's bankruptcy only solidifies the fundamental elements of decentralised finance.
As we all now know, Sam Bankman-Fried’s cryptocurrency empire is divided into two main parts: FTX and Alameda Research. These companies are supposed to be two separate businesses. But according to a private financial document reviewed by CoinDesk, Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto. The situation adds to evidence that the ties between FTX and Alameda are abnormally close. Sam Bankman-Fried was quietly using customer funds from the FTX in a way that flew under the radar of investors, employees and auditors in the process, according to a source. Instead of holding the money, Alameda was borrowing billions from FTX users, then trading it without their knowledge. Mixing customer funds with counterparties and trading them without explicit consent, according to US securities law, is illegal. Moreover, such actions also violate FTX’s terms of service.
Changpeng Zhao, the chief of the world’s largest crypto exchange Binance has said no one can be protected from a “bad player”. Speaking at a meeting of business leaders in Bali after the collapse of Sam Bankman-Fried’s FTX last week, Zhao said the crypto industry “collectively has a role to protect consumers”. “To be very frank, if a guy is very good at lying and is very good at . . . just pretending to be what he’s not, [if] somebody wants to violate the law, the law is not going to prevent that,” said Zhao. The crypto industry needs to improve its transparency and provide its users with the right balance of rules. Regulations in crypto historically circled around Know Your Customer (KYC) and Anti-Money Laundering (AML). However, new rules must focus on exchange operations, such as business models and proof of reserves. Increasing transparency and educating regulatory agencies about crypto audits and cold wallet information will make the industry much healthier.
It is not the industry`s fault that the FTX founder decided to make money on his exchange company by turning to unscrupulous actions. Taking a proactive approach to regaining investor confidence, Binance published a new page that displays details about the exchange’s on-chain activity for its hot and cold wallet addresses to show proof of reserves. Other smaller rivals, including Crypto.com, OKX and Deribit, have also promised to publish proof that they hold sufficient reserves to match their liabilities to customers. Steps like that must have been taken by the crypto companies on the regular basis. This is possible to realize with a smart set of regulations.
Praegressum Coalition follows the regulatory models for digital assets as well as blockchain technologies all over the world. It has become clear that smart regulations are able to create a safe and prosperous environment for the crypto industry. Some policymakers are concerned that overlooking the industry may put the financial system at risk and the case of FTX makes this fair very reasonable. That is why more and more governments have already developed laws and regulations on the national level. For example, the European Union regulations for the cryptocurrency sector – the EU’s Markets in Crypto-Assets (MiCA) law – covers issuers of unbacked crypto-assets, and stablecoins, as well as the trading venues and the wallets where crypto-assets are held. The MiCA law protects both consumers and investors, standardizes actors, and supervises the energy consumption of crypto assets.
South Korea also passed legislation on anti-money laundering and combating the financing of terrorism. The regulations implement mandatory requirements for a wide range of virtual asset service providers. This step creates a safer economic environment, with financial regulators gaining access to data regarding crypto transactions, which due to the technical nature of the blockchain protocol are helpfully preserved with each additional transaction.
Another regulatory model is the United Arab Emirates Virtual Assets Regulatory Authority (VARA) which aims to protect and regulate the stakeholders in virtual asset services. VARA’s mandate includes monitoring trading activities in virtual asset services to prevent price manipulation and establish high standards of protection of personal data.
It is certainly worth leveraging the most beneficial regulations from other successful frameworks. This would bring the industry in line with similar regulations legacy financial institutions have been subject to for decades without changing the inherent benefits of decentralized finance (also known as DeFi). A set of laws regulating digital assets would also bring greater stability to the national economy while consumers would enjoy greater protection. This would help ensure that the governments and their citizens would get all the benefits that crypto and blockchain are offering avoiding falls and collapses.