Last week FTX, once one of the world’s largest cryptocurrency exchanges, imploded as investors lost trust in the company’s solvency. Cryptocurrency prices fell dramatically in its wake, leaving countless other actors exposed. The full extent of the contagion remains to be seen.
FTX’s problems stem from the solvency crisis that started in June. In hindsight, it is clear that Alamada and FTX were heavily impacted, but these events were covered up by creative accounting, misuse of client funds and public relations.
While dramatic, these types of events have happened before in our industry and are likely to happen again as crypto continues to grow and mature. Whether it was Mt. Gox in 2013 or the ICO bubble of 2018, crypto markets have taken massive hits before. Up to now, they have always rebounded and grown larger and stronger.
Nonetheless, there are lessons to be learned here. We think there are three:
This was not a failure of decentralisation – quite the contrary: FTX was a large, centralised, highly opaque entity whose success was heavily dependent upon the reputation of one charismatic individual. This is the polar opposite of the ideal of a decentralised financial system. In a decentralised world, where individuals control their own funds, protocols mandate transparency, and algorithms enforce trust, an FTX could never happen. Unfortunately, many unregulated, centralised entities may invite scammers, bad actors and even tempt businesses to engage in high-risk activites and operate against their own terms of service – something that we should never expect to continue. This includes, above all, the misuse of client funds.
Now, DeFi can offer several advantages compared to traditional finance, but its unregulated trade-offs must also be considered. These include the presence of countless P&D scams and cyberattacks as well as the lack of KYC checks, AML monitoring and consumer safeguards.
This was not a failure of blockchain technology: Similarly, it is important to point out that FTX’s demise had nothing to do with blockchain technology. In fact, the technology is trustless and works perfectly. New entrants and traditional players across the financial system and in other sectors continue to embrace blockchain as well as decentralised business models and approaches for its clear potential to help renew and revamp legacy infrastructure.
As always, good governance is the key: While we embrace the ideal of decentralised systems, decentralisation alone is not a “one-size-fits-all” solution. We also realise that centralised intermediaries of various kinds – for example, exchanges or crypto banks like ourselves – have a necessary and useful role to play as enablers of a safe, secure and efficient digital asset econony. What separates good from bad actors in the crypto world is the same thing that separates them in the legacy world: good governance, prudence, responsibility and integrity. These are the standards by which investors and others should measure their counterparties in the crypto space.
Having worked hard and diligently to not take any shortcuts in building our business, and having not serviced a single client or carried out a single trade until we were fully vetted and licensed by the relevant authorities (Switzerland and Singapore), we like to think of ourselves as firmly working for the greater good of the industry. The majority of our peers in crypto too.
If there is any silver lining to last week’s event, it is that through this process, the crypto market is ridding itself of bad actors and moves to self-impose higher standards of transparency. It will likely also lead to renewed calls for ever-more stringent regulation. We hope these calls won’t lead to a stifling of the great innovation that the decentralisation ideal embodies. But rather, towards renewed efforts that will merge the power of DeFi together with the trusted elements of CeFi (strong governance, proper KYC/AML measures, risk controls and security) as a realistic yet innovative path forward. Western regulators have an opportunity to safely enable this growth.
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Learn more about digital asset banking at Sygnum here.
About Sygnum
Sygnum is the world’s first digital asset bank, and a digital asset specialist with global reach. With Sygnum Bank AG’s Swiss banking licence, as well as Sygnum Pte Ltd’s capital markets services (CMS) licence in Singapore, Sygnum empowers institutional and private qualified investors, corporates, banks, and other financial institutions to invest in the digital asset economy with complete trust. Sygnum operates an independently controlled, scalable, and future-proof regulated banking platform. Our interdisciplinary team of banking, investment, and Distributed Ledger Technology (DLT) experts is shaping the development of a trusted digital asset ecosystem. The company is founded on Swiss and Singapore heritage and operates globally. To learn more about Sygnum, please visit www.sygnum.com.
Disclaimer
This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.
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