In this post, we’ll look at the epic collapse of one of the largest crypto exchanges and explain why in a couple of years, the industry will look back and say that this was one of the most positive developments for mass adoption. Sadly, many investors were hurt, the ripple effects will be large, and the pain felt is widespread. But let’s see why this will turn out to be such a positive for this new asset class.
On November 8, 2022, one of the largest and most significant exchanges, FTX, was found to be insolvent after the company’s balance sheet revealed over $9 billion in liabilities and only $1 billion in assets. This led to the equivalent of a bank run as customers rushed to withdraw their funds.
The gap in assets and liabilities was due to Alameda Research, FTX’s affiliated crypto trading firm, which was allegedly receiving stolen customer funds from FTX to trade and gamble on risky startup ventures. Setting aside any personal beliefs on whether the SEC should govern this market or whether it’s best to allow the market to operate freely, it’s undeniable that this type of behavior cannot be allowed to exist in the crypto market if the industry wants to continue to grow into a well-respected and globally adopted asset class.
The way in which the FTX debacle has been so widely publicized should accelerate the timeline of crypto regulation that has been so noticeably absent. If you want to learn more about the unbelievable details, feel free to Google “FTX and Alameda collapse.” It’s truly remarkable in the worst way possible. So why in the world is this a positive?
Many institutions have been on the sideline, waiting for regulatory clarity before investing in crypto. This fallout could be the catalyst that leads to a robust regulatory framework, one that restores investor confidence and increases institutional adoption in the years to come.
DeFi Stands Resilient
Finally, it’s extremely important to point out that these recent collapses in the ecosystem have been caused by the centralized players, not the decentralized blockchains and protocols in crypto. FTX was simply a case of fraud and egregious mismanagement. It has no bearing on the underlying assets just like the Bernie Madoff ponzie scheme was not an indictment on the entire stock market. The president of El Salvador, Nayib Bukele, eloquently contrasted FTX and the Bitcoin network:
“FTX is the opposite of Bitcoin. Bitcoin’s protocol was created precisely to prevent Ponzi schemes, bank runs, Enron’s, WorldCom’s, Bernie Madoff’s, Sam Bankman-Fried’s—bailouts and wealth reassignments. Some understand it, some not yet. We’re still early.”
Decentralized finance (DeFi), which was built to avoid centralized failure like this, has operated flawlessly while this contagion has been playing out. If the SEC wants to step in and do their job to protect investors, then this industry needs to be better regulated. Period. But it needs to be done so that it not only prevents these centralized players from blatant acts of deception and illegal activity, but also doesn’t cripple the growth and innovation of the DeFi sector and the crypto industry. To learn more about the incredibly exciting new DeFi sector, check out this post here < >.
Thanks for reading! If you enjoyed this, check out the other articles and don’t forget to follow me on Twitter @andrewdfarrar for up-to-date crypto content. In these crazy times, it’s never been a more important time to learn about this new asset class.