Who is to blame for FTX, future cryptocurrency failures?
Is it the fault of fast-growing crypto exchanges that offer potentially high asset gains but insufficient security? Or are regulators to blame? Is the technology that supports the crypto market flawed to begin with?
These were some of the questions raised during the Abu Dhabi Finance Week, which ended today and earlier in the week Binance CEO Changpng Zhao came under fire from members of the public. and speakers on the future of crypto.
The CEO of the largest infrastructure provider to the $1 trillion global crypto industry assured the public that crypto will be fine and does not need to be backed up. Yet speakers such as the outspoken chief economist of Atlas Capital Nouriel Roubini described Zhao and the entire crypto industry as “hidden, corrupt, crooks, criminals, crooks” and more.
The crypto market was valued at $2.9 trillion at its peak this month last year, according to CoinMarketCap, a subsidiary of Binance Holdings, but now and after FTX’s bankruptcy it has lost around two-thirds of its value, reaching approximately $1.7 trillion.
In the case of FTX, which has focused on this issue, some say the fault lies primarily with business practices.
“The FTX situation stems from financial fraud rather than blockchain or crypto-specific failure,” according to New York-based blockchain analytics firm Chainalysis, which claims crypto investors are placing their digital money where their trust is. His research revealed that the rate of users withdrawing money from crypto has returned to pre-FTW crisis levels. Yet, while the majority of deposits are at centralized crypto exchanges, this rate has declined over the past month.
“We also saw spikes in funds being sent to personal wallets for safekeeping,” wrote On-chain analysis in his Twitter breakdown of FTX’s collapse.
Users are embracing decentralized exchange (DEX), or peer-to-peer trading, instead of relying on assets and transactions entrusted to centralized banks or exchanges.
“Many have reported huge spikes in DEX trading volumes in what is being touted as self-custody membership,” the blockchain analytics firm explained.
This disengagement from exchanges is not a good sign for regulators, who juggle the difficult role of protecting investors and preserving financial stability while maintaining the attractiveness of the crypto-asset sector and other financial innovations.
Regulate the unknown
If the blame lies with regulators, how can they create effective, evidence-based rules for untested financial innovations?
This question was posed by Al-Monitor to a group of key global regulators during a panel discussion at the Abu Dhabi finance talks.
This “seems like an oxymoron and it’s still a challenge for us to manage,” said Wai Lum Kwok, senior executive director of authorization at Abu Dhabi’s Global Market Financial Services Regulatory Agency. .
He said the solution lies in testing and collaborating early with the necessary talent and without real risk, which the UAE capital did in 2016 with its regulatory sandbox. This confined space allows financial institutions and government regulators to test theories, see their impact, and avoid risk while keeping the cost of innovation low and lowering the barrier to entry for new innovations.
In the neighboring emirate of Dubai, FTX received a full license to operate as a crypto exchange in July and on Wednesday in Abu Dhabi, Binance said it had obtained a financial services authorization, a license to provide custody services to professional clients in the emirate’s financial free zone.
“The type of innovation we’re seeing in this region may not be what other jurisdictions face, and I think we’ve gotten off to a good start despite the recent turmoil in the industry,” Kwok said. , whose market was one of the first globally to establish its framework of crypto assets in 2018.
He said that while the crypto winter has temporarily dampened the appetite of financial institutions, the ADGM sandbox is attracting players from the gaming industry who are interested in the financial sector and are testing decentralized finance solutions and of the Internet of Things to improve the security of crypto contracts and transactions.
Slow and steady?
Some countries represented on the panel expressed the need for a more conservative regulatory approach.
“People are allowed to trade or make a deal, but banks have not been allowed to deal in crypto assets so far,” said Upendra Kumar Senha, the former chairman of the Securities Exchange Board of India, who said his country is more focused on fintech that benefits the general public and will wait to see how crypto plays out.
In the United States, the debate over whether crypto is a security or a commodity is ongoing, with its classification and regulation remaining a key topic among lawmakers.
“We need to ensure that these crypto-financial activities are brought into the regulatory perimeter so that they are subject to the same standards as other financial companies. This is, I think, a critical point,” said Caroline Pham, commissioner of the US Commodity Futures Trading Commission.
“When we are in a framework of global markets, the risk cannot be contained in a particular jurisdiction,” she told Al-Monitor and the rest of the audience on stage, saying that this debate does not hinder the process of financial innovation but rather to ensure its viability to avoid financial travesties like the case of FTX.
The US Department of Justice is currently investigating Binance for possible money laundering, according to Reuters.
Pham said that with their approach, the United States had effectively unlocked American innovation. She added: “If you think about Fintech more broadly, we have the deepest and most liquid stock markets in the world. So I think the American system works, but in an election year there’s a lot of debate, of course.
In his 32 play-by-play tweets of what happened, former FTX CEO Sam Bankman-Fried said dealing with regulatory structures can be frustrating and inefficient.
“A huge amount of work – much of it arbitrary – and relatively little consumer protection,” Bankman-Fried wrote. He also acknowledged: “It’s really difficult to be a regulator. They have an impossible job: to regulate entire industries that are growing faster than their mandate allows.
Regulators are unable to control as well as they ideally would, the former CEO added. He ended the chain of tweets by writing that he now plans to do “what matters”: do good with FTX clients whose finances have plummeted along with the value of the crypto market.