FTX was a global top 3 platform with a recent scandal over fraudulent use of its activities. On this platform, assets were held in custody and, while clients thought that their assets were in custody, they have been operating with them without their clients knowing. When those assets have gone to be withdrawn by those clients, they realized that they were invested elsewhere and could not access them.
The platform was valued at 32 billion dollars (approximately 32 billion Euros), its founder, Sam Bankman-Fried, was a well-known figure in the American business world or enjoyed great credibility among those close to him.
The story comes from previous months. As of June 2022, several companies went bankrupt due to malpractice (for example, the Terra-Luna case explained in this post ). In this situation, the company Alameda Research (another company in the FTX group) began to have counterparties that could not pay them and the assets of FTX clients were used to plug the Alameda hole.
When this fraudulent use of misappropriation came to light, users started massively withdrawing money from FTX. In this way an extreme lack of liquidity was created and the company declared itself insolvent.
What happened could have been avoided?
There are several elements that come into play when reflecting on the experience of the events that occurred. Perhaps the consequences could have been minimized if certain market structures were set up differently. We give some examples by way of illustration:
- Employing external companies that guard the assets of their clients. Since FTX itself managed the funds in their entirety and did not have a clear separation of powers, all parts of the same group have been contaminated. In other words: the same company acted as Custodian, Exchange and Liquidity Provider, which was a problem.
- Making a correct use of the FTX token , the FTT. You have to be critical of the misuse of generating your own token and using it as collateral. There have been some loans between the companies FTX and Alameda that were based on a guarantee value that was not real.
- Practicing in-depth audit exercises in all activities and assuming an adequate legal framework in reference to all its powers.
The traditional financial world has already created structures that help offset risks. On the other hand, in the crypto world there are still players, as has been the case with FTX, who bring all the figures together under the same umbrella and, therefore, have too much power and ability to manipulate without giving visibility.
Some of the figures of the traditional world (exchange, broker, clearing house or custodian) were centralized in the same actor: FTX. This fact has caused a very high risk that has certainly not made it possible to isolate the malpractice of their service and their clients have been left completely unprotected.
Most likely, the adoption of cryptocurrencies requires guarantees and tests in which users can have greater transparency. The solution to these problems involves a greater degree of transparency and independence of the roles in order to certify the security of user funds without opposing private interests.
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