Lessons Learned – A Year After the FTX Collapse
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It’s just over a year since CoinDesk published the story that led to FTX filing for bankruptcy just nine days later.
The exchange’s dramatic collapse had a monumental impact on the industry, brutally unearthing suppressed and ignored concerns over trust, regulation and the extent of fraudulent activities.
But such traumatic events can also serve as a watershed moment, dividing the timeline between how things were once done and how they’re now done.
So, what’s been learned? What’s still to be learned? And what can we expect to see going forward?
The high-profile CEO
As a PR professional, I’m well aware of the value of a high profile for CEOs.
FTX’s Sam Bankman-Fried certainly had the kind of profile that was up there with the best in terms of gaining and holding attention.
Unkempt, eccentric, philanthropic a billionaire before thirty. SBF was unique. And he was savvy enough to leverage this image alongside extensive and expensive marketing campaigns.
SBF was just as comfortable or perhaps just as nerdily uncomfortable onstage alongside Bill Clinton and Tony Blair as at the Super Bowl with celebs like Katy Perry, all of which he voraciously cultivated.
Such associations and endorsements serve to elevate credibility and visibility, building reputation and trust.
After all, it’s human nature to judge at ‘face value’ and make decisions due to associations with trusted personalities.
Crucially, though, this is not how a finance company or the burgeoning new crypto sector itself should ultimately be weighed by prospective participants.
SBF’s public image unfortunately seems to have held sway as the main determinant of his brand’s trustworthiness.
Indeed, it even elevated him to one of the new figureheads for the whole industry.
In his downfall, though, he now serves as a stark embodied reminder of why DeFi (decentralized finance) was born in the first place.
What transpired with Bankman-Fried and FTX serves to underscore the primary importance of simple, good old-fashioned due diligence.
Image, personality and narrative can be seductive, but due diligence should always be enough to steer through their siren song.
Cultivating a culture of transparency
One of the central issues that FTX’s collapse highlighted is the need for rigorous audits and oversight within the cryptocurrency industry.
Prior to the bankruptcy, at least four CPA firms were involved with FTX two of which were conducting audits of FTX entities. Yet fraudulent activity went undetected.
This raises serious questions about how such critical issues could be overlooked.
Crypto’s fundamental promise is its decentralized nature, designed to empower individuals and eliminate undue influence.
To preserve this core ethos while building trust, the industry should consider measures such as hiring third-party auditors to certify operations.
Regular internal checks could proactively identify and address discrepancies, averting larger issues down the road.
To mitigate such collapses in the future, mandatory holdings reporting, regular audits and transparency regarding ownership and control of crypto exchanges may become necessary.
The evolving regulatory landscape poses challenges for crypto platforms, requiring compliance for differentiation.
Institutional investors are increasingly exploring digital assets, necessitating that platforms offer security, liquidity and financial instruments.
Governments are moving towards clearer crypto regulations, fostering institutional market entry.
One area in which custodians can contribute is to adopt proof-of-reserve programs.
By such programs, businesses holding cryptocurrency create public attestations as to their assets and liabilities.
This demonstrates that crypto held on deposit matches up with user balances.
Proof-of-reserve wouldn’t have prevented FTX’s insolvency, but in a world where such programs become common, any platform’s failure to provide one would raise suspicions.
Another aspect of enhancing trust involves ensuring that firms provide mandatory ethics training for their teams, instilling a culture of responsibility and ethical behavior from top to bottom.
Creating a culture of accountability and vigilance within organizations and protecting whistleblowers would not only help identify problems but serve as another contributor to the fostering of that all-important trust.
What’s the deal with Binance
The FTX collapse is, of course, not an isolated case. Similar patterns have emerged in other industry projects, including Celsius, Voyager Digital and Terra/Luna.
These cases have raised concerns about regulatory compliance, co-mingling of user funds and transparency.
The opacity and financial practices of such projects have highlighted the need for a robust regulatory framework that fosters trust and accountability.
And then there is Binance, the world’s largest crypto exchange accounting for more than half of all trading volume but with balance sheets as impenetrable as those of Bankman-Fried’s companies before their collapse.
Binance discloses no location, revenue, profit, cash reserves or the role of its BNB token.
Unlike its US rival Coinbase, as a private company Binance is not required to publish detailed financial statements, and without raising external capital since 2018, it hasn’t had to share financials with outside investors since then.
The company actively avoids oversight, insulating its main operation from US regulatory scrutiny.
Binance’s financial information is guarded by founder CZ, and even the former CFO did not have access to the full accounts during his tenure.
CZ also declines to publicly identify the entity controlling the main exchange, raising further concerns about transparency.
The SEC in June 2023 sued Binance on allegations of violating federal securities laws by offering unregistered securities to the general public in the form of its BNB token and Binance USD (BUSD) stablecoin.
It would later follow up with further charges, filing a total of 13 against Binance entities and founder Changpeng ‘CZ’ Zhao.
Binance’s efforts to dismiss the SEC’s lawsuit do not have a basis in the law, the federal regulator said in a filing on November 8, 2023.
The SEC pushed back against Binance’s motion to dismiss the suit, saying the motion relies on ‘distorted’ and ‘tortured’ interpretations of both federal law and precedents.
It will be interesting to watch how this battle unfolds and how the tone is to be set for future regulatory measures.
Looking forward ollapses and rebuilding
The crypto industry is deep into a phase of introspection and reform, as it grapples with the aftermath of FTX. However, it’s important to remember that the challenges faced are not unique.
Every sector has experienced crises, and it is how the industry responds and adapts that matters most. Individuals must be well-informed about the crypto market, understanding its risks and rewards.
Investors must learn to perform a certain amount of due diligence for example, If a company does not provide transparency, perhaps it’s wiser to take finances elsewhere.
It is essential to strike a balance between supervisory oversight that safeguards against systemic risk without stunting innovation and growth.
Nobody knows where and when the next crisis will arise, but despite many lessons learned, there’s far to go and it’s only a matter of time before the next one.
The collapse of FTX highlighted the massive duplicity underlying many crypto exchanges, but its implosion should not be attributed to that alone.
It, like so many companies in the cryptocurrency industry, had propped itself up on an imaginary foundation of tokens it had invented, and that foundation was bound to fail eventually.
The FTX collapse serves as a stark reminder that the cryptocurrency industry is not without its challenges.
However, the lessons learned from this incident offer an opportunity for the industry to evolve, address vulnerabilities and pave the way for a more secure future.
The importance of audits, transparency, ethical practices, regulatory compliance and informed decision-making has been highlighted.
As the industry continues to evolve, these lessons will be instrumental in building a foundation of trust and stability for crypto and blockchain technologies.
The industry has been shaken to its foundations, but that’s no bad thing t’s more than capable of building them properly.
Valeriya Minaeva is the founder of VComms, a native Web 3.0 communications firm, and is also a main contributor to DeFi protocol 1inch Network.
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Author: Valeriya Minaeva
