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© Reuters Will the FTX explosion be the final straw for Crypto?
  • The collapse of crypto exchange FTX is the most recent and high-profile case in the turbulent history of crypto;
  • All tokens have been hit hard and it is unclear whether FTX customers will recover their deposits.
  • Prominent crypto figures fear the collapse will lead to heightened market scrutiny, though many are keen to point out that “FTX is not crypto.”

Over the past week, Sam Bankman-Fried’s $32 billion FTX empire has been swiftly dismantled in front of a stunned online audience. From the report alleging that FTX was backing sister hedge fund Alameda with client deposits, to Binance’s bailout offer that was later withdrawn, to the inevitable bankruptcy announcement, it was like watching a crash. idling car – but which left crypto investors empty-handed and severely eroded crypto’s hard-earned confidence.

The situation continues to evolve, although at this point it seems clear that Bankman-Fried will be in serious legal trouble, with regulators around the world investigating the collapse.

But whatever the end of this saga, one thing is certain. The demise of FTX, and the repercussions it will have on retail and institutional investors, is likely to inflict the kind of lasting damage to the crypto industry that the collapses of Luna, Three Arrows Capital and many others were unsuccessful – one that the industry may never recover from.

“FTX is not crypto”

As crypto pundits dig through the rubble to try to build a coherent picture of what led to the collapse, the main theme emerges – FTX, and centralized exchanges in general, are not considered “crypto”. FTX really looked more like a stockbroker disguised as a crypto exchange.

What crypto insiders would call “real” crypto, like DeFi apps like decentralized exchanges Sushi and PancakeSwap, requires holders to operate digital wallets like MetaMask, understand gas fees, and operate knowing that there is no “customer support” should things go wrong.

The technical barrier to adopting “real” crypto is quite high, which is why most retail crypto investors prefer to deal with a centralized exchange like FTX that takes custody of their tokens.

And therein lies the problem.

“In many jurisdictions, centralized exchanges are not required to have audits to ensure customer deposits are protected. Worse still, some allow exchanges to lend customer deposits, like banks, but without proper risk management in place. If you pair that with leverage using illiquid assets as collateral, then you’re asking for trouble,” said Matthew Niemerg, president of blockchain company Aleph Zero. open door to murky financial engineering – as was the case with FTX.

“From the early days of MtGox until the recent fall of FTX, the biggest losers have always been the consumers. It’s the more centralized part of the decentralized system that has problems here,” Niemerg added.

Regulators step in

While some regulators are already comparing the collapse of FTX to that of Lehman Brothers in 2008, it is in some ways different – ​​for starters, large financial institutions’ exposure to FTX is relatively limited, as is household exposure.

Crypto expansion has typically been funded by venture capital, as well as sizable amounts of retail investor money from a relatively small group of traders. When institutional investors piled in, they largely stuck to allocating single-digit percentages of their funds, as was the case with pension funds caught in the meltdown.

However, the damage to the crypto’s reputation and chances of mainstream adoption will likely be profound, with some worrying whether FTX’s demise will be the crypto’s deathblow.

Regulators waste no time intervening. A Reuters report, citing sources familiar with the matter, said the SEC, among other regulators around the world, was already investigating FTX. That should come as no surprise, as FTX said it expects to have over a million creditors in its bankruptcy filing.

But crypto experts worry that regulators are cracking down on the wrong parts of the industry, aiming to introduce blanket policies, when instead, they say, they should focus only on centralized exchanges.

“Hopefully regulators will learn from the consequences and support measures that could have helped distressed users,” said Igneus Terrenus, director of public liaison at Davion Labs, a crypto incubator founded by crypto exchange Bybit. . These measures could include requiring exchanges to draw a clear demarcation of client funds on deposit, as well as subjecting their books to regular audits.

“While many industry players lament turning to regulators to protect depositors, when it comes to centralized exchanges or entities that hold coins for others, there is little left. options, if any,” said Niemerg of Aleph Zero. But a more likely outcome is sweeping regulation that also targets decentralized financial apps, which proponents say require less oversight because they are, in theory, run by code.

If even the major crypto players can’t be trusted, who can?

It is often said that one way to cure a hangover is to drink more alcohol. In the wake of FTX’s crash, crypto insiders say the only way for crypto to reach its potential and avoid another crash is… more crypto.

Or rather, more decentralized finance. DeFi apps allow users to trade tokens with each other, removing themselves from the equation (unlike Coinbase (NASDAQ:) or Binance, for example).

They do this through smart contracts, which are code that automatically executes trades and uses cash provided by other users. These transactions are then visible to everyone because they are recorded on the blockchain, while centralized exchanges record them off-chain.

“What concerns us most is the lack of transparency and evidence of reserves for centralized exchanges. If it hadn’t been for an internal leak within Alameda, the show would continue. Should we rely on leaked information to truly understand the state of whether a token is truly liquid or not? Surely this goes against the founding principles of Web3 to bring decentralization to finance,” said Harsh Rajat, CEO and co-founder of Push Protocol, a Web 3.0 communications protocol.But for users and investors harmed by the collapse of FTX, further crypto help in any form is unlikely to be welcome.And DeFi applications are still plagued by multimillion-dollar hacks, such as the $320 million hijacked from the Wormhole Bridge in February.

So where does that leave crypto?

“Clearly a lot of the ‘adoption’ we’re seeing so far is speculation and trading, and that’s tangential to making crypto useful. It’s also very entertaining,” Barney said. Mannerings, co-founder of Vega Protocol, a derivative layer for Web 3.0. “We have work to do, and that requires moving away from price charts.”

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