November 11 marked the one-year anniversary of FTX’s declaration of bankruptcy, and just nine days later, Sam Bankman-Fried was found guilty on all criminal charges against him and sentenced to a lifetime in prison. The trial has been seen as a significant moment in the crypto industry, with different interpretations of its symbolism. Some view it as a catharsis for policymakers, allowing them to believe that justice has been served and move on. Others see it as a wake-up call, exposing the vulnerabilities of the crypto market and suggesting that the hype is over and the market may not recover.
Dea Markova, managing director and head of digital assets at Forefront Advisers, argues that these views are overly simplistic. She believes that having a well-regulated crypto-asset market would attract more risk-averse and institutional capital, benefiting the industry as a whole. However, she acknowledges that the downfall of FTX has made regulatory conversations more adversarial and that the industry needs to address how it can prevent similar catastrophes.
In reality, most of the crypto industry agrees on the core principles of running an investment business, such as proper authorization, custody, and client asset segregation. These principles are already well-established in regulated markets, and exchanges have been moving towards proof-of-reserves to support client asset segregation. However, there are limitations to this accounting technique, and exchanges need to go beyond it to demonstrate their responsibility.
For those with a background in financial services, the requirements for a well-regulated crypto market are not a paradigm shift but a natural progression. The collapse of FTX has accelerated the adoption of these requirements by service providers. In the European Union, the Markets in Crypto-assets Regulation (MiCA) was already in the works before the FTX saga unfolded. The subsequent updates to MiCA are part of the administrative process and do not indicate that the regulation is already out of date.
The biggest disagreement left by FTX is the fundamental question of what value the crypto-asset market brings to society. While regulators should not pre-determine market innovation, they have a responsibility to ensure its safety. The industry should not dismiss regulators’ knowledge and instead focus on answering the question of the value of crypto-assets to society. The industry often points to disintermediation and decentralization as the value propositions of blockchain technology. However, regulators see these concepts as avoiding responsibility and preserving anonymity, which can have negative consequences such as money laundering and terrorism financing.
To move away from this polarizing debate, the industry should consider decoupling non-custodial services from anonymous services. This would allow users to own their funds and data while addressing concerns about anonymity and regulation. However, this choice goes to the core of why crypto was invented, and there will likely be differing opinions on the matter.
In conclusion, the FTX collapse has had a significant impact on the crypto industry, exposing its vulnerabilities and sparking regulatory conversations worldwide. While most of the industry agrees on the core principles of running an investment business, there are still debates on the extent of asset and activity segregation. The industry also needs to address the value of crypto-assets to society and find a balance between innovation and regulation. Only then can the industry regain trust and move forward.
