Why the FTX collapse has nothing to do with blockchain

Why The FTX Collapse Has Nothing To Do With Blockchain
Why The FTX Collapse Has Nothing To Do With Blockchain

By Alan Vey, Founder & CEO, Aventus

Since the collapse of FTX, one question has risen above the rest – not only in the crypto world, but perhaps even more predominantly in mainstream society: If you can’t trust FTX, who can you trust?

Some see this series of unfortunate events as indisputable proof that the blockchain industry is rotten to the core. Broken from the inside out. Doomed for failure. 

At its height, FTX was the second-largest crypto centralised crypto exchange by volume. Within a fortnight, it went from being trusted by millions to losing billions of dollars and causing aftershocks throughout the entire industry.

But the fact is, the collapse of FTX has nothing to do with blockchain. It wasn’t crypto (or the principles of blockchain) that failed. It was much more simple than that: a good, old-fashioned centralised scam. 

And FTX’s new CEO, John Ray – who was also appointed CEO of Enron during its bankruptcy and for recovering more than $828 million for creditors – agreed: 

This is really old-fashioned embezzlement. This is just taking money from customers and using it for your own purpose, not sophisticated at all.

John Ray, Wall Street Journal, 12 December 2022

In fact, Gavin Wood, who founded Ethereum and Polkadot, said it best:

The Power of Regulation

The crux of crypto, and indeed, blockchain, can be summarised in the age-old adage: “don’t trust – verify”

Exchanges like Coinbase, Kraken and Bitstamp, for example, hire reputable auditors – often one of the Big Four – to prove that you not only have the assets that you say you have, but also that you don’t have liabilities that exceed these assets. Deloitte audits Coinbase. EY audits Bitstamp.

And people are beginning to understand (or re-understand) the value that regulated, transparent and audited exchanges bring. Since October, the market share of exchanges like these has increased around 30 basis points. 

In fact, even amidst all the unbelievable activities that happened within FTX, the power of regulation shone through:

Based on our review over the past week, we are pleased to learn that many regulated or licensed subsidiaries of FTX, within and outside of the United States, have solvent balance sheets, responsible management, and valuable franchises.

John Ray, FTX Press Release, 19 November 2022

This is an extremely powerful symbol of the protection that regulation brings in our industry, which is so crucial for its long-term sustainable growth. 

If FTX was a decentralised exchange comprised of smart contracts, its activities might have been more transparent, verifiable and auditable – precluding many of the openings for fraud and mismanagement that are, ultimately, symptoms of centralised finance. 

But while we wait for increased adoption of DeFi, we need a robust, comprehensive regulatory framework that is suited for the industry’s current maturity levels and value. One that demands transparency, audits, reporting and regular scrutiny, and that empowers and equips regulators to detect and neutralise small explosions before they become nukes.

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