By Hadrian Lam
Like dominoes, crypto giants Terraform Labs, Three Arrows Capital, Celsius, etc. are going down one by one, and this time it’s FTX. The former third largest centralized cryptocurrency exchange (CEX) just filed for bankruptcy and the exchange had nearly $9 billion in liabilities and $9.5 billion in assets, according to a Bloomberg report. The swap has been endorsed by the likes of Tom Brady and Steph Curry, and the Miami Heat’s stadium is even named after the swap.
Before his ouster, the exchange’s founder, ex-CEO Sam Bankman-Fried, even featured in the Forbes 400 and was heralded by Fortune Magazine as the next Warren Buffet. It could be said that the collapse has directly resulted in the price of major cryptocurrencies Bitcoin and Ethereum being plundered by more than 20%.
So what went wrong? In short, FTX turned out to be run by a group of friends who had little integrity and risk management skills, and were overly dependent on their own FTT token, which had no intrinsic value. Alameda Research, a trading firm also owned by Bankman-Fried, has been discreetly using FTX client funds to fund its operations.
A news article on how Alameda Research used FTX client funds as collateral and lost a lot of money due to the recent economic downturn and poor trading decisions, FTX in turn failed to call back their loans.
Foreseeing the inevitable disaster, leading crypto exchange Binance saw an opportunity to bring down one of its biggest competitors and decided to liquidate its entire holding of around $2.1 billion worth of FTT tokens. While this could simply be bankman-fried retaliation for Binance CEO Changpeng Zhao (despite Binance claiming this as a post-exit risk management strategy), the liquidation resulted in a bank run of $451 million worth of FTT tokens on FTX. The price of FTT collapsed by 94%, from around $25 to currently $1.50. It also meant that there was no way for Alameda Research to liquidate its assets.
I propose that there should be no regulation. let me finish
More recently, a “hack” of $400 million worth of tokens on FTX was reported following the exchange’s bankruptcy, while the exchange was actually preparing to trade around $380 million worth of tokens in the coming years release in batches. Although this could be coincidence, Alameda Research had always accessed FTX funds through a backdoor installed by, you guessed it, Bankman-Fried.
So was this actually a so-called “hack” as described by Bankman-Fried, who is currently under “police surveillance” at his luxurious Bahamas mansion? It’s possible that the “hack” was an inside job using the same backdoor that Alameda Research has always used. At the time of writing, the “hacker” converted the stolen funds into ETH and has just dumped around 25,000 ETH worth around $30 million, causing the price of ETH to fall by 4%.
demand regulation?
The price of the unregulated nature of the crypto industry is illustrated by the success of the FTX Ponzi: FTX executives got richer than ever, FTX clients lost all their deposits, prices of major cryptocurrencies fell and people became more skeptical about crypto than ever . Additionally, crypto is often perceived as “untraceable,” making it perfect for money laundering and leading many to call for more regulation in the industry. However, this is simply not true and I propose that there should be no regulation. let me finish
First of all, crypto is traceable. Transactions made on decentralized exchanges (DEX) could be tracked using tools like Etherscan. The purpose of blockchains and cryptocurrencies is to enable a decentralized ecosystem where people have sole ownership of their money without being ripped off by regulations (taxes) and centralized institutions (banks).
The problem we currently have as in the case of FTX is that there is not enough regulation for a centralized institution. Imagine if there were neither the FCA nor the SEC in the real world to regulate the centralized institutions aka banks, brokers, mutual funds, etc. Do you think any of them would “play fair”?
Ever since crypto was conceived, it has always been said that “not your wallet, not your tokens” many people either don’t understand or just choose to ignore. Depositing your money on a CEX like FTX is basically a deposit into the exchange’s wallet, a custodian, similar to depositing into a bank, a centralized entity, and if there’s a bank run, it’s over.
Not only has FTX improperly loaned client funds from its right hand to its left hand, but it also appears that no accounting work or due diligence work has been performed on its operations, which would definitely have raised many flags had it been a centralized institution in traditional finance . Given that FTX was a CEX, I totally agree that there should have been regulations, but centralization is exactly what crypto isn’t about or shouldn’t be. Even Alamanda Research knew for sure as they actually settled their debt on the DEX Abracadabra and chose not to do it on FTX as the records were not public on the platform.
Regulations are often imposed for the financial benefits they bring, and they are often manipulated by governments and big institutions for their own interests
Are there also regulations in the interest of private customers? Or has regulation always been used as a tool to protect the interests of elites and those in power, with the side effect of occasionally protecting the end customer?
Regulations are often imposed for the financial benefits they bring, and they are often manipulated by governments and big institutions for their own interests. Examples include Liz Truss’ mini-budget to boost banker bonuses at a time when the general population is suffering from the high cost of living, and China’s zero-Covid policy to protect the integrity of the Chinese government and stem the outflow of prevent cash. Even with the current financial regulations that we have, many are still able to circumvent such regulations through loopholes through political lobbying or foreign shell companies. And that’s why DEX is the only way to move forward because CEX are inherently flawed and the power of regulations is largely limited.
For cryptocurrencies to shake off their negative image and aspire to be a widely accepted currency, CEXs should not exist as they directly contradict the fundamental value of blockchain technology’s decentralization. CEXs are products of people trying to mimic traditional financial practices in the unorthodox realm of crypto, and capitalize on crypto’s profitability due to its unregulated nature. Therefore, regulations for centralized institutions are necessary because greed is human nature.
For those who are then wondering “how are we supposed to avoid yield farming scams or avoid investing in worthless tokens”, it must be clear that when you are in complete control of your own wealth, you are also responsible for your own risk management are. “Your wallet, your money” which means you have to do all the due diligence yourself before investing in anything, and that’s common sense. The mindset of having a layer of protection through a third party needs to be “decentralized” if one really wants to meddle in the crypto ecosystem. There is always the option of traditional funding if you think crypto is too risky.
Image: Mariia Shalabaieva via Unsplash
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