Who is to blame for FTX, the future cryptocurrency failure?

ABU DHABI – Amid the fallout from the collapse of the FTX currency exchange last week, investors and economists are scrambling to figure out where to steer what Reuters has called.at least $1 billion” the loss of funds from clients who have questioned the viability of the cryptocurrency market.

Is it the fault of rapidly rising crypto exchanges that offer high asset returns but inadequate security? Or are the regulators to blame? Is the technology supporting the crypto market flawed to begin with?

These were some of the questions raised Abu Dhabi Finance Weekgathered today and earlier this week saw Binance CEO Changpeng Zhao take the heat on the future of crypto from audience members and speakers.

The CEO of the largest infrastructure provider in the $1 trillion global crypto industry assured the audience that the crypt will be fine and does not need to be saved. However, speakers at the event, such as Atlas Capital’s sharp chief economist Nouriel Roubini He described Zhao and the larger crypto industry as “hidden, corrupt, insidious, criminal, fraudulent” and more.

False confidence

The crypto market was valued 2.9 billion dollars at the peak of this month last year, according to the subsidiary Binance Holdings CoinMarketCap, but now and after the failure of FTX, it has lost about two-thirds of its value, reaching approx. $1.7 billion.

In the case of FTX, which has brought this issue into focus, some say business practices are primarily to blame.

“The FTX situation stems from financial fraud, rather than a blockchain or crypto-specific failure,” according to New York-based blockchain analytics firm Chainalysis, which says crypto investors are putting digital money where their trust is. His research found that the rate of users charging crypto has returned to pre-FTW crisis levels. However, although most deposits are in centralized crypto exchanges, this rate has been decreasing over the past month.

“We’ve also seen it in funds sent to personal wallets for safekeeping,” he wrote chain analysis on his Twitter in the breakdown of the FTX collapse.

Users adopt decentralized exchange (DEX) or peer-to-peer trading, instead of relying on holdings and transactions entrusted to centralized banks or exchanges.

“Many have reported huge increases in DEX trading volumes in what is being posited as an embrace of self-care,” the blockchain analytics firm explained.

The move away from exchanges is not a good sign for regulators, who juggle the difficult task of protecting investors and preserving financial stability while maintaining the appeal of the crypto-asset sector and other financial innovations.

Regulate the unknown

If the onus is on regulators, how can they create effective, experience-based rules for untested financial innovations?

This question was posed by Al-Monitor to a group of the world’s top regulators during a discussion at Abu Dhabi Finance Week.

“It sounds like an oxymoron and it’s always a challenge for us to manage,” said Wai Lum Kwo, chief executive officer of authorization at the Abu Dhabi Global Market Financial Services Regulatory Agency.

He said the solution lies in testing and collaborating with the right talent and without real risk, which the UAE capital did in 2016 with its regulatory sandbox. This closed space allows financial institutions and government regulators to test theories, see their impact and avoid risks, reducing the cost of innovation and lowering barriers to entry for new innovations.

In the neighboring emirate of Dubai, FTX received one full license To operate as a crypto exchange in Abu Dhabi in July and Wednesday, Binance said it had obtained a financial services permit, a license to offer custody services to professional clients, in the emirate’s free financial zone.

“The kind of innovation we’re seeing in this region may not be what other jurisdictions are dealing with, and I think we’re off to a strong start despite the recent boom in the sector,” said Kwok, whose market was one of the first. globally to implement it scope of crypto assets in 2018

He said that while the crypto winter may temporarily dampen the appetite of financial institutions, ADGM’s sandbox is attracting gaming industry players interested in the financial sector and experimenting with decentralized finance. The Internet of Things solutions to improve the security of cryptographic contracts and transactions.

Slow and steady?

Some of the countries represented on the panel expressed the need for a more conservative regulatory approach.

“People are allowed to trade or make a deal, but banks have not been allowed to deal with crypto-assets at the moment,” said Upendra Kumar Senha, former chairman of the Securities Exchange Commission of India, which he said is his country. more focused on fintech that benefits a larger audience and will wait to see how crypto plays out.

In the United States, the debate over whether crypto is a security or a commodity has been ongoing, with its classification and regulation remaining a key issue among lawmakers.

“We need to make sure that these crypto financial activities fall within the regulatory perimeter so that they are held to the same standards as other financial companies. This, I think, is a critical point,” said Caroline Pham, commissioner of the US Commodity Futures Trading Commission.

“When we are in the field of global markets, the risk cannot be contained in any particular jurisdiction,” he told Al-Monitor and the rest of the audience on stage, saying that this debate does not hinder the process of financial innovation. guaranteeing its viability, to avoid financial travesties like the case of FTX.

The US Department of Justice is investigating Binance for possible money laundering Reuters.

Pham said that with his approach, the US has effectively unlocked American innovation. He added: “If you think about fintech more broadly, we have the deepest and most liquid capital markets in the world. So I think the US system works but in an election year there’s a lot of debate, of course.”

In the same 32 game-by-game tweets of what happened, Sam Bankman-Fried, former director of the FTX, stated that dealing with regulatory structures can be frustrating and ineffective.

“A huge amount of work – much of it arbitrary – and relatively little consumer protection,” Bankman-Fried wrote. She also acknowledged: “It’s really hard to be a regulator. They have an impossible job: to regulate entire industries that are growing faster than their mandates allow.” .

Regulators can’t police it properly, the former CEO added. He ended the tweet chain by writing that he now plans to do “what’s important” – doing good to FTX clients whose finances have fallen along with the value of the crypto market.