FTX debacle: crypto industry rues latest setback

The cryptocurrency market is seeking a cure for gunshot wounds to both feet. The price of bitcoin and other cryptocurrencies are in freefall as the Alameda investment group teeters on the brink of collapse, threating to bring down FTX – its parent company and the world’s second largest crypto exchange.

The latest debacle has baffled and angered even the most die-hard crypto advocates.

“Trust in the market is completely lost,” says Michael Guzik, CEO of Swiss digital assets lending matchmaker CLST. “Even the most sophisticated crypto players are now saying they are done with this market.”

“This is probably just the tip of the iceberg. The Sword of Damocles is hanging over anyone who lent Alameda money.”

FTX was seen as a lifeboat, a beacon of strength, reliability and solid leadership, with the crypto markets already suffering a collapse in prices and credibility. For the reputation of the crypto industry, FTX is deemed too big to fail.

Social media bulletin boards are a mass of despondency. The technology is great, they say, but it’s operated by too many cowboys. A former Swiss banker I recently spoke to had just run away from his new job at a crypto firm because risk controls were non-existent.

Stories abound of venture capitalists manipulating the price of digital tokens with pump and dump schemes, sometimes paying celebrities to endorse schemes, and of so-called market makers trading against their clients using inside information.

The big question is if there is any way for cryptocurrencies, digital assets and decentralised finance (Defi) to rebound from the latest scandal.

“We need a new wave of financial institutions with proper risk management and collateral management systems in place who do not indulge in speculation bingo,” says Guzik.

Launched earlier this year, CLST intends to introduce market discipline to digital assets lending. Its objective is to provide lenders and borrowers with market data that allows them to properly assess the risk of counterparties and the collateral they stump up. It also plans a function to automatically liquidate collateral if it falls below a certain value threshold.

Despite being a leading player in the crypto industry, the Bahamas-based Alameda is an opaque private company that managed to hide the exact nature of its activities in a thinly regulated market.

“People have been mis-using digital assets to maximise their profits,” says Ronald Kogens, a partner at Switzerland’s MLL law firm. “The market must move in the direction of greater transparency.”

One way to do this is to transfer activity away from central pain points, like Alameda, and onto decentralised blockchains, which were designed for cryptocurrencies.

The crucial selling point of Defi is that it automates crucial steps, such as market making and liquidating positions, without favour and reveals relevant data equally to all participants.

But it has so far failed to always live up to these promises and is a long way from mass adoption. This hasn’t been lost on financial supervisors.

The Swiss Financial Market Supervisory Authority this week listed Defi as a potential long-term risk to the financial system. FINMA is concerned by “inherent instability” of hacks and the like, plus problems in identifying who bears responsibility if things go wrong.

The Alameda/FTX scandal will hardly have improved the mood of regulators towards the nascent technology.