What’s next after the FTX debacle?

Aftershocks from the FTX collapse begin to rage in the sector a good week later. The fear of tough regulation is growing day by day. In the US, several financial supervisory authorities are already involved in the case. And if confidence in the crypto sector was already on shaky ground, it should now be completely in ruins.

Sam Bankman-Fried is said to have had a good relationship with lawmakers. The FTX case should therefore not only feel like a breach of trust for the politicians involved, but a true disgrace. This can have harsh consequences.

More (self) regulation in the crypto space?

Immediately after the events of the FTX case, several political voices spoke up. The head of the US Securities and Exchange Commission (SEC), Gary Gensler, called for more regulation for the sector. For months, his authority has been busy punishing smaller projects or prosecuting individual influencers. The FTX debacle didn’t stop their “regulation by prosecution” in the last few months.

With the Consumer Protection of Digital Assets Act (DCCPA) currently being introduced in the US Senate, a large number of US senators want to finally push through clear guidelines for crypto regulation. However, the proposal has been criticized primarily by advocates of the DeFi industry. The charge: DCCPA promotes centralization and plays into the hands of the major exchanges. In her eyes, the law simply imposes on the crypto industry the outdated and flawed design of the traditional financial world. One of the law’s biggest supporters: Sam Bankman-Fried.

His opponent, Binance chief Changpeng Zhao ( CZ ), instead called for more self-regulation by the other, centralized players in the sector. For example, via the “Proof-of-Reserves” procedure, where exchanges must publish regular, verifiable proofs of their crypto reserves.

A change of heart in sight?

Sam Bankman Fried joins a long list of failures in the crypto sector. Do Kwon, Kyle Davies, Zu Shu and Alex Maschinsky make up the sad crypto-celebrities on the edge of this bear market. None of them have had legal consequences. In contrast, the programmer of Tornado Cash Code, an open source privacy protection software, is in prison.

Tornado Cash and the DCCPA are examples of the suspicions many supervisory authorities have about the decentralized financial system. But the target of their anger is misunderstood. The decentralized sector seems to be working. Toxic hubs emerge where the power of centralized actors converges and meets the new, largely unregulated sectors of the crypto industry.

Due to the unclear regulation in the main jurisdictions of the world, many players have been pushed into a shady world. It is now a matter of bringing light into the darkness. In an interview, Coinbase CEO Brian Armstrong stated that he sees “positive steps in the right direction” in the new regulatory efforts from the EU, Hong Kong or Singapore.

Regardless of some other shortcomings, the EU has set clear rules for exchanges on how to handle customer funds, for example with the new MiCA regulation. Stefan Berger, member of the EU Parliament, is therefore convinced that future regulation will be able to prevent “Lehmann Brothers moments” in the sector.

Global technology, global laws

FTX was headquartered in the Bahamas. Here, the exchange enjoyed benefits of favorable regulatory provisions while enjoying the image of a flagship crypto exchange with its American branch. And although CEO Bankman-Fried ensured the safety of the US-based trading platform to the end, both ended up insolvent.

Jake Chervinsky, head of the Blockchain Association lobby group, sees this as one of the biggest problems in the sector. In his opinion, there is “no law in the US Congress that can prevent an offshore company from failing”.

This makes it clear: A global technology also needs globally coordinated legislation. Corrupt actors in the sector must apply in the Bahamas what also applies in the US, the EU or elsewhere.

Moreover, the trading platforms must not only withstand scrutiny by regulators, but also by their customers. This requires technologies that are as intuitive and accessible to them as customers already use on other platforms in the Web3 sector.

At any rate, most people are more aware of the need for extensive regulation than ever before. The crypto sector was set back years after the FTX bankruptcy anyway. If the regulators intervened too hard, this effect would only be amplified.

In light of the previous debacle, one should also be skeptical of complete self-regulation. Ironically, however, with blockchain technology, the industry has gained all the means to replace trust with control and auditability at key points. But these resources must be used properly. Statutory entrenchment of these funds may prove to be the happy medium.

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