Thoughts on FTX Crypto Exchange Collapse

2022 has been a “cold” year for the crypto industry – crypto prices collapsed, Terra’s USD stablecoin crashed and last month, the FTX crypto exchange filed for bankruptcy. The resulting contagion affected crypto-lenders such as Genesis Trading, Gemini and Galaxy (and there is a possibility that other crypto trading venues may fail in the near-future).

To the outside observer, it is easy to conflate the FTX failure as a failure of crypto or more broadly blockchain/web3 (perhaps akin to attributing the dot com busts in 2000 as a failure of the internet). In my opinion, this is not the case, the FTX failure was a failure in governance, risk management & fiduciary duty. It was a failure resulting from centralisation and not a failure of blockchain technology.

How can this be avoided in the future? Distributed ledgers do need governance that is responsible and transparent e.g. proof-of-reserves. In particular, centralised exchanges (CEX) as compared to decentralised exchanges (DEX) do require some guardrails of sorts – e.g. periodic stress testing (liquidity risk & counterparty risk) and reporting. The hope is that regulators come forward with sustainable and not draconian measures as a result of knee-jerk reactions, and trading venues move more towards transparent governance and reporting.

One of the recurring questions in the wake of the FTX failure (together with the others from 2022) is whether crypto has any real-life utility. I wrote a post on crypto utility, financial inclusion and stablecoins where I cite real-life projects (Mandla Money, Stellar Aid Assist) that are using stablecoins to drive financial inclusion and/or deliver humanitarian aid – proving that crypto does indeed have utility apart from speculation.

Although much of 2022 has been crypto winter and dominated by bad press, I share the same sentiments with Pershing Square’s Bill Ackman that “crypto technology’s potential for beneficent societal impact may eventually compare with the impact of the telephone and internet on the economy and society.