The sudden collapse of FTX, the third largest exchange by trading volume just two weeks ago, has been disastrous. At current estimates, more than $1 billion worth of clients’ funds are unaccounted for and those who placed their trust in FTX will be hoping they can get even a fraction of their deposits back.
It’s important we make the clear distinction that the collapse of FTX was not the result of a failure in crypto. Throughout the crisis, the technology underpinning this entire industry has worked exactly as it should have; no one hacked funds right off the blockchain. New blocks have continued to be added to the Bitcoin blockchain every 10 minutes or so, as they have consistently over the past 13 years.
Just like Enron or Lehman Brothers before it, the failure of FTX was an all-too-human one. But this was still a major setback for the industry. People have lost money and their trust in crypto has been severely undermined. This will only hamper the mass adoption of a technology and an asset-class that can genuinely help people secure their own financial freedom.
The industry now has to rebuild trust and demonstrate that we’re here to accelerate the adoption of cryptocurrencies, an asset-class that introduces transparency, accessibility and accountability into the financial system. Last week’s events were diametrically opposed to these values; the industry should restore confidence by adopting and enshrining business practices that enhance transparency and ultimately make this ecosystem a much safer place for investors.
We’ve been encouraged to see a number of our peers follow Kraken’s lead and announce plans over the past week to show proof of reserves. However, disclosing exchange wallet addresses simply isn’t enough. As we saw last week, withdrawals can’t be fulfilled if liabilities outweigh client reserves. Accounting firms should be engaged to verify reserves and the industry should actually leverage blockchain technology itself so clients can verify for themselves that balances are held in reserves.
Crypto is a mission-driven industry and shouldn’t be open to those who aren’t here for the mission or who don’t care about the security of their clients. There are plenty of good actors in the industry who work with regulators and have built their entire business around the key principles of investor safety and security. Many of the larger industry players already provide free explainers and guidance on how investors can navigate this ecosystem safely.
Listen to clients
Of course, it’s understandable that many crypto holders, particularly former clients of FTX, may never want to trust a centralized exchange again. Now is the time for the crypto industry to listen to their clients and figure out how they can build a robust infrastructure to prevent anything quite like this from happening again.
Crypto’s key innovation is it enables anyone to become an independent financial participant and to literally be their own bank. A renewed emphasis on transparency can flush out those who see this industry as just a convenient cash grab and restore it to its real goal which is to provide crucial life-changing access to financial services, something that is still denied to well over one billion people globally.
Still, we know many have been hurt by last week’s events, as well as some of the much-publicized failures from earlier this year. As our co-founder Jesse Powell said: “Ultimately, we all have a responsibility to humanity to protect crypto and deliver it, unadulterated, to the masses. We can do that by being good crypto citizens, self-regulating, attacking the cancers among us and leading by example.”
This isn’t just a business; this is a mission. We are trying to build out a vision of financial inclusion and financial freedom. By enhancing transparency and rebuilding trust, we hope everyone will ride with us and build a better industry alongside us.