In November 2022, cryptocurrency exchange FTX fell into crisis. The company is headquartered in the Bahamas but has offices in Miami and Chicago and was until recently the second-biggest crypto exchange in the world in terms of volume. It all started with an expose that revealed FTX’s own cryptocurrency, FTT, was being used by the exchange's founder as collateral for loans. In the wake of this news, several large institutions sold their reserves of FTT, and many FTX users began to withdraw their funds.
Within a week, FTX paused all withdrawals, unable to provide liquid funds to cover user assets. In short, the company was bankrupt, and although Binance initially stepped in to save FTX, it has since given up on the deal. The company was valued at $32 billion just a few months ago but has now filed for Chapter 11 bankruptcy, causing a crisis in the cryptocurrency market.
Although bankrupt exchanges aren’t new to cryptocurrency, with Mt GOX being one of the first, this year has seen several high-profile cases, including Celsius, Voyager and now FTX. In recent years, trust in cryptocurrency as a viable asset has been growing among retail investors, but this could send serious shockwaves through the market. Since then, prices have fallen, and most agree that changes are needed in the industry.
Improved Crypto Education
The biggest, and perhaps most important thing that could improve trust in cryptocurrency is improved education. Cryptocurrency is still relatively new in terms of financial investments, and the fast-changing nature of the industry means that investors often struggle to keep up. Better education can help investors gain more confidence in their investments and help to remove some volatility from the market.
Not only that, but a cryptocurrency course online, while it does not provide investing advice, can help investors understand the potential viability and application of projects. This will help them to better avoid less reputable crypto investments and avoid keeping their coins on centralised exchanges. Books, podcasts, articles and online courses can all help to improve the overall sentiment towards the cryptocurrency market while also improving investor decisions. This will lead to a healthier market and one where junk projects and poorly run exchanges are less likely to gain traction.
Cryptocurrency has long been resistant to regulations and goes against the original idea of a decentralised currency. However, the lack of regulations does little to inspire trust in investors and can lead to the issues that caused the FTX collapse. The exchange was loaning a significant portion of its assets, the funds of users, to another company to essentially gamble with.
Better regulations can ensure investors can place more trust in the exchanges they use and don’t have to worry about their assets in case an exchange goes bankrupt. This has the potential to make the crypto market much safer and lead to more stability overall. While some in the industry continue to reject calls for regulation, it could certainly help prevent these issues in the future.
Proof of Reserve
Since the collapse of FTX, many users have been understandably worried about the status of their funds on other exchanges. Crypto investors are usually advised not to leave funds on an exchange, but it makes trading much easier and more convenient. Many of the biggest exchanges have since published proof of reserves to show that any liabilities are covered by liquid assets.
In the future, transparency over proof of reserve could be a feature of crypto exchanges. If these exchanges want users to trust them with their money, they should be happy to show that they have enough liquidity to cover any withdrawals at all times.