You’ve likely heard by now about the failure of FTX, the world’s second largest crypto exchange, founded by Richie Rich aka Sam Bankman-Fried aka SBF aka self-avowed book skeptic.
I’m not going to bother you with the details of the so-called collapse and its timeline. After all, others have beat that dead horse back alive. Instead, I’m going to cut right to the chase and speak emphatically about the long-term fallout from the failure (let’s call it what it is).
“Collapse” makes it seem like it was unavoidable, as if FTX collapsed in the same way that a cave might collapse under the pressure of thousands of pounds of falling rock rolling over the top of it (the cave couldn’t prevent that with all the foresight of a biblical prophet). Likewise, “liquidity crisis” makes the whole thing sound like SBF and his adorable exchange simply had a bad day. Neither of these scenarios explains the terrible way SBF and his fellow polycular particle, amphetamine enthusiast, and alleged Alameda Research CEO managed the—ahem—affairs of their business.
Can’t you just hear the discussion in the conference room after the fifth boink of the day?
"Geez, Sammy, I think we might have a liquidity crisis on our hands. You appear to have lost all your deposits," says the cheeky “I’m-just-here-for-the-coffee-cakes” Caroline Ellison.
"No problem, Little Bunny," retorts SBF, with a vegan James Dean gleam. "Merely a slight collapse. We’ll be up again in no time."
Hmmmm … no, let’s call it a failure. A failure to maintain boundaries that lead to a healthy professional relationship. A failure to adequately manage customer assets. A failure to apply sound business principles to very risky endeavors. And let’s not forget the failure of Kevin O’Leary and other mature investors to conduct adequate due diligence.
Failure.
That’s the correct word and the word that I’ll use to describe FTX’s plummet from a mountaintop it should never have been on. But what will be the fallout?
There has already been fallout from FTX’s failure, but there is more fallout to come. We’ve seen the short-term fallout: Falling markets, topsy-turvy volatility, FUD, a ripple effect of crypto firms sliding with the avalanche. I could go on. But let’s discuss the long-term fallout.
There are three primary ways the FTX failure will impact the entire crypto industry moving forward.
1. More decentralization – People are beginning to wake up to the fact that centralized exchanges, centralized lending firms, and centralized (fill in the blank) cannot be trusted. Even if good intentions rule the day, bad things happen in the unregulated cryptosphere. And bad things are more likely to happen under the unprotected oversight of bad managers. Therefore, it’s best to protect your assets before they go missing. I’ve said this before, and I’ll keep saying it until it becomes a Brainyquote meme: Decentralization is the best security against the failures of centralized institutions. Last month, decentralized exchange (DEX) trading volume increased 79 percent over the previous month. Look for that to trend to continue. In 2023, I expect more people to conduct their crypto trades through DEXs.
2. More self-custody – In 2017, Didi Taihuttu converted all his assets into bitcoin. After the FTX failure, he moved more than $1 million in bitcoin into DEXs. And what’s so special about DEXs? They’re noncustodial. That means traders must use self-custody wallets instead of commingling their assets in a dirty pool. I see a lot more people moving in the direction of self-custody, and we can’t blame it all on FTX. It hasn’t been a good year for crypto lenders either. Remember: Not your keys, not your crypto.
3. More regulation – Governments have been talking about regulation for a few years. In the U.S., that train is moving slowly. But the Biden Administration has stepped up its game. The SEC is getting aggressive in pursuing crypto firms, and the CFTC has started taking action. The Fed wants to regulate stablecoins. One thing is certain: The FTX failure put crypto regulation on everyone’s radar, not just the glaring eyes of a few of crypto’s frenemies and whack-a-doo detractors. People within the industry are calling for regulation and voters are blowing kisses at regulatory agencies, as well. Crypto regulation will likely come sooner rather than later, and I believe we’ll see something substantive in 2023.
You could say the theme of the FTX failure is Less is More.
Yes, we have fewer crypto exchanges now, and fewer crypto lenders. Fewer people are conducting business through centralized crypto entities, which means there is less going on in the halls of Centraland. That less going on will lead to more self-custody, more decentralization, and more regulation.
You can bet your two bits on those three mores.
For further reading:
Which Cryptocurrency Are You Most Looking Forward to Recovering in the Next Bull Market?
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Cryptocracy is a decentralized newsletter published several times a week. I curate the latest news and crypto analysis from some of the brightest minds in crypto, and sometimes offer a little insightful and snarky commentary. Always fresh, always interesting, and always crypto. Original articles on Fridays.
First published at Cryptocracy. Not to be construed as financial advice. Do your own research.
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