FTX collapse: The issues and the impact
There will undeniably be changes as a result of the FTX collapse. However, the amount and scale of changes may be unprecedented. Here’s what we believe could change.
When FTX collapsed in early November, 200, the crypto market was shaken — losing billions and falling below a $1 trillion valuation. As the crypto market is so volatile, there have been countless pleas to create more regulations to prevent something like this from ever happening again. So, with calls to make extreme changes to the crypto industry, here are some predictions of what changes to expect from the FTX collapse.
What happened to FTX?
Before we dive into what changes may come from FTX, it may be worth explaining what happened to FTX and what regulations perhaps could have prevented it. FTX’s collapse happened over a ten-day period in November 2022. It all began with a scoop by none other than CoinDesk, who revealed that Alameda’s investment foundation was also in FTT — a token that its sister company had invented. It caused major concern regarding solvency and leverage.
Binance then sold its FTT tokens and FTX announces a liquidity crisis which Binance then announces it will bail out. However, after conducting due diligence, Binance walks away from the FT acquisition. On November 12th, FTX alleges it has been hacked and moved digital assets to cold storage, apparently for security reasons. The Bahamas then took control of the FTX held there.
Bankman-Fried, the founder of FTX, is then arrested but released on a $250 million bond. Interestingly, this is the largest bond in history, by a federal judge. So, with that summarised, let’s dive into some of the changes we may expect from this FTX fallout, in a hope that it would prevent this from ever happening again.
Are cryptocurrencies securities or commodities?
Regulators are currently debating whether cryptocurrencies are considered commodities or securities, which would, of course, change various laws and regulations surrounding them. With them being clearly defined, more in-depth, and precise regulations. It’s also worth noting that regulatory initiatives already in the making are likely to be brought forward at a quicker pace, with the FTX creating much more urgency. The debate around whether or not cryptocurrencies fall under securities or commodities will hopefully be defined more distinctly.
Custody and Protection
The new regulatory initiatives are likely to focus on the protection and custody of customers’ digital assets — similar to the traditional financial system. In fact, many retail crypto investors are already practicing self-custody of their cryptocurrencies. The FTX collapse will likely create institutional crypto custodians — these will monopolize crypto exchanges and crypto-native custodians. Furthermore, a big issue with FTX was the bundling together of trading, broker, clearing, and custody activities. This caused issues with customers’ asset protection, conflicts of interest, and market manipulation. The unbundling of these is likely to be a big trend.
Of course, regulatory changes regarding transparency will also become prominent. By mandating regular reporting and auditing assets, liabilities, and reserves, there will be a lot more openness thus creating much more trust. It’s becoming increasingly important to educate all players in the crypto sphere, including regulators, accountants, and lawyers. This is especially true in the wake of the FTX collapse. Neither regulators nor lawmakers want nor need another FTX disaster to unfold.
As so many changes are happening in the digital assets space, having trusted critical thinkers keeping up with regulatory and law changes is integral. That’s where we come into help.