Home » As FTX implodes, the crypto exchange model draws scrutiny

As FTX implodes, the crypto exchange model draws scrutiny

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Critics say this week’s revelation that the collapse of crypto exchange FTX could hurt up to 1 million investors is fundamentally flawed in the foundations of the $850 billion digital currency market. reveals what the

As Bahamas-based company implosion Experts said that while it has caused turmoil across the cryptocurrency market, the concern is less with the cryptocurrency itself and more with the loosely regulated companies that serve cryptocurrency investors.

For investors, FTX is your gateway to the world of crypto, an exciting marketplace that has invited celebrity ambassadors like quarterback Tom Brady to open accounts and trade digital currencies such as Bitcoin and Ether. did. FTX functioned in many ways like traditional financial banks and brokers, maintaining customer accounts, exchanging currencies, lending and investing in customer assets.

Is crypto the house of cards? Behind the scenes.

However, like other cryptocurrency exchanges, FTX operated outside of the traditional banking system, which created significant risks. Although they act like banks and brokers, cryptocurrency exchanges are typically not subject to the same kinds of regulations, insurance and disclosure rules that protect customers of traditional banks.

“In some ways, the fall in FTX is the crypto story,” said Adam Levitin, a Georgetown University law professor and principal at Gordian Crypto Advisors, a firm that provides advice on cryptocurrency bankruptcy. No. “People have invested billions of dollars in unregulated financial institutions based on Caribbean islands.

The FTX case has shown at scale that companies holding cryptocurrencies on behalf of their customers can make catastrophic investment decisions, in which case their customers get their money back. there is no warranty.

At least $1 billion worth of customer funds have been lost from FTX, one of the largest exchanges in the industry, according to Reuters. The situation is under investigation by the Department of Justice and the Securities and Exchange Commission. In its bankruptcy filing, FTX revealed that he may be in debt to over one million people and organizations.

FTX is one of the largest cryptocurrency exchanges, and its founder, 30-year-old Sam Bankman-Fried, was widely hailed as a cryptocurrency prodigy, so the demise drew attention. Top Democrat DonorBut over the past year, other cryptocurrency companies have also found themselves in financial trouble as the overall value of the cryptocurrency market plummeted from its peak of over $3 trillion.

Sam Bankman-Fried fascinated Washington. His crypto empire then collapsed.

crypto lender Celsius network When voyager digital It filed for bankruptcy earlier this year after failing to meet customer withdrawal requests. Last week, another lender, BlockFi, announced that it was “unable to conduct business as usual” and was “suspending customer withdrawals” following the collapse of FTX. This week, cryptocurrency exchange AAX Called Stop Withdrawal, cites technical issues with third-party partners. And on Wednesday, cryptocurrency lender Genesis said it was temporarily suspending redemptions and opening new loans.

These issues have worried investors, prompting executives at other large cryptocurrency exchanges such as Coinbase, Crypto.com and Binance to assure customers that their balance sheets are strong. Some have portrayed the FTX demise as an anomaly in an otherwise safe industry.

In a statement to The Washington Post, Patrick Hillman, chief strategy officer at Binance, the largest cryptocurrency exchange, referred to Bankman-Fried, saying, It’s a direct result of breaking all the basic rules.” “While the rest of the industry operates under intense scrutiny, the cult of personality that cloaks FTX allowed them a dangerous level of privilege that they didn’t get.”

However, the lack of regulation poses risks for cryptocurrency investors, experts said. In the United States, the financial standing of traditional banks is subject to regulation and public scrutiny. If FTX had undergone similar scrutiny, its financial vulnerabilities could have been exposed earlier. In addition, traditional bank customer deposits are insured by the FDIC up to $250,000. Such protection does not help those who lose money on FTX.

FTX is one of several large crypto exchanges that have played a key role in the adoption of cryptocurrencies, including paying for Super Bowl ads to reach a large audience.Pew Research Center According to a survey, 16% of US adults say they have invested in or traded in cryptocurrencies at some point.

Cryptocurrencies Are Suddenly Everywhere – Except at Cash Registers

Some firms “have been allowed to get very large despite their apparent disregard for the rules imposed on traditional financial institutions,” he said, citing greater transparency in capital markets and said Tyler Gerash, chairman of the Healthy Markets Association, a group focused on reducing conflicts of interest. .

“Banking and securities rules are set up so that even if a bank or broker fails, you can still get your money back,” Gerash said. “Crypto exchanges do not appear to comply with any of them.”

Since FTX filed for bankruptcy last week, several major exchanges are looking to become more transparent. Last week, Binance released a brief description of its crypto holdings, but not its liabilities.

Binance chief Changpeng Zhao said the company will release a full financial statement in the coming weeks if the third-party auditors are able to complete their work. Zhao did not specify the auditor, but said the same company also worked for FTX.

“Nothing is without risk, right? Crypto exchanges are inherently a very risky business,” Zhao said in a Twitter Spaces chat on Monday. “You have to run them well. You have to do security well. You have to do a lot of things well.”

Unlike FTX, Zhao said Binance does not take on debt. “We are a very clean and simple business,” he said. “We’re not trying to be a pawn shop or a hedge fund shop.”

Crypto.com CEO Kris Marszalek held a video live stream on Monday amid rumors online that the company has stopped processing withdrawals. Marszalek acknowledged a brief surge in withdrawals after he said the company mistakenly transferred about $400 million worth of transactions to its accounts at a competitor’s exchange.

However, he said the suspension rumors were “absolutely not true”, adding that “we are operating normally again”.

In what Marszalek has touted as an effort to restore depositor confidence, Crypto.com reveals it has at least $2.3 billion in cryptocurrency reserves as of Nov. 14. and published a partial breakdown of its cryptocurrency holdings. However, the company’s outstanding debt has not been made public and was not included in the first reports released by the company after the collapse of FTX.

Marszalek downplayed Crypto.com’s exposure to FTX on Monday, assuring investors that the company’s balance sheet is “very robust.” He said a “third-party audit” of the exchange’s customer reserves will be released in the coming weeks.

Singapore-based Crypto.com has spent a fortune on a flashy marketing campaign, recruiting actor Matt Damon as its brand ambassador and acquiring the naming rights to Los Angeles Staples Center in a deal valued at an estimated $700 million. . However, the price of its native token, cronos, has plummeted this year. In this past week, Kronos has lost more than 50% of it. worth, It fuels questions about the solvency of exchanges.

Marszalek said the next audit would prove his position remains strong.

“We don’t run a hedge fund. We don’t trade client assets,” he said in a livestream. It’s going to look really, really bad for throwing out unfounded allegations.”

Coinbase, the largest listed cryptocurrency exchange, is based in the United States and is subject to more disclosure rules than most other large exchanges, a point its executives stress. The company says it has sought and obtained licenses in all the jurisdictions it needs to do business in the United States.

“The laws and regulations of these jurisdictions contain various obligations, such as capital requirements,” the company said in a statement.

Alesia Haas, the company’s chief financial officer, wrote: blog post It said last week that the company’s “publicly audited financial reports have confirmed that there are no liquidity issues.”

Still, regulators are urging caution.and speech Last month, Acting Commissioner for the Comptroller of the Currency Michael J. Su warned of a dangerous attempt by cryptocurrency exchanges to “disguise” themselves as banks.

“The cryptocurrency industry was born out of a desire to disrupt the traditional financial system,” Su said. “Nevertheless, cryptocurrencies imitated [traditional finance] A concept to market and grow itself… Using the familiar to introduce the new can downplay or obscure the associated risks, thus establishing false expectations. Eventually people will get hurt. ”

The visionaries who laid the groundwork for Bitcoin and other digital currencies are also asking questions about exchanges. Cryptocurrencies were supposed to eliminate the need for banks, brokers and other so-called “financial intermediaries”. Many early supporters were critical of the financial system, which they viewed as predatory and opaque. The key white man who launched Bitcoin said his paper envisioned excluding banks because it would allow “online payments to be sent directly from one party to another without going through a financial institution.” I was.

When centralized cryptocurrency exchanges take on the role of banks and brokers, critics say: The original ideal of cryptography.

Professor of Scientific and Technological Research at the University of California, Davis,Digital Cash: The Untold History of the Anarchists, Technicians and Utopians Who Created CryptocurrencyCentralized crypto exchange It essentially replicates the same risks and lack of transparency that existed in other financial institutions, but with even less regulation and oversight. ”

In their bankruptcy filings, Celsius and Voyager explained their failures in a way that draws parallels with traditional banks. Both explained how the surge in customers demanded asset withdrawals. Neither company had the resources to return their customers’ money and were forced to file for bankruptcy protection.

In court documents, both companies used the same phrase to describe their issues. They were hit by a “bank run,” according to documents.

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