The crypto world must be made safer for investors and users

The author is an independent financial commentator

The sudden collapse of the crypto exchange FTX raises serious questions about the condition of the crypto ecosystem. Without serious changes in its way, it is difficult to imagine how it could be part of the existing mainstream finance system, let alone replace it, as some would like to see.

The crisis at FTX and in front of the crypto loan Celsius, Voyager, the Hedge fund Three Arrows Capital and the digital token Terrausd and Luna have little to do with cryptocurrency as technology. Rather, it shows what financial systems look like if there are no sufficient checks and balances. Crypto people compete against central banks and supervisory authorities, but they exist for good reasons.

What exactly went wrong with FTX is still unclear. The CEO, Sam Bankman-Fried, insisted that it was only a liquidity failure. But Binance, which originally agreed to buy FTX to support liquidity, withdrew from business after he had seen his books. There are reports that FTX has a balance sheet hole of about $ 8 billion. If someone is not ready to invest a lot of capital, FTX will finally register bankruptcy. Investors count on the worst: Sequoia Capital has already written off his participation to zero.

It is even more worrying that customers are apparently at risk. In fact, it is difficult to imagine how a balance sheet hole of this size could have developed if the stock exchange had not given customer money.

Reuters reported that FTX Alameda Research borrowed customer funds after it was difficult to meet by Three Arrows Capital and Voyager in May this year. And the US Justice Ministry and the US supervisory authorities are now investigating relationships between FTX and Alameda, including whether customer funds may have been abused.

When customer money has been awarded and Bankman-Fried failed to find a buyer who almost pays the full price (which seems to be a big challenge), the customers of the international stock exchange from FTX seem to lose a significant part of their funds. Some - maybe many because FTX attracted retailers and encouraged normal people to pay their wages on his accounts - will result in difficulties.

ftx is by no means the first crypto company that fell in the middle of token collapse, bankruptcy and allegations about the use of customer funds. The recent failures by Celsius, Voyager and in 2021 of the crypto loan Cred have similar features. These mistakes are based on four main weaknesses in the crypto ecosystem:

• Influencies between companies in the form of opaque crusades and circular credit practices such as further pledging. The rival crypto exchange Binance had a considerable share of the native token from FTX, FTT. When it announced that it would sell its participation, people sent it to flee to sell FTT himself and deduct their funds from FTX.

• Too much trust in personalities. Crypto should eliminate the need for trust between people. "Do not trust, verify" was the mantra. But the entire system now seems to be dependent on a few major personalities who trust thousands. Bankman-Fried is one. In a short time he built a huge empire and donated a lot of money for good purposes. He seemed to be an all -round good guy. So people trusted him with their money. Investors in particular have shown a remarkable willingness to support his activities without the usual financial due diligence.

• concentration. There are not many large crypto exchanges and banks, and those who operate all know each other and invest in the companies of others. When you get in, everything is fine; But if you fall out, you can do immense damage. It should not be possible for a Twitter from the CEO of Binance to run a run that brings down his greatest rival; But that's exactly what happened.

• opacity. Crypto should improve the transparency of financial transactions. But crypto companies like FTX give very little about their financial status - much less than one would expect from a conventional bank. The opaque of the companies of Bankman-Fried, FTX and Alameda, was deteriorated by a complex corporate structure, internal corporate transmissions and the reported use of stocks on a native token to strengthen the balance sheet.

These problems will be painfully familiar to anyone who has dealt with the history of financial panics and banking crises. They seem to be endemic in financial systems. Crypto has shown that it is no different.

If Krypto is to have a future as a mainstream finance product, it must now accept regulation and controls that make financial systems secure for investors, creditors and inserters.