2 years after the FTX collapse, trust and confidence are more important than ever
Originally published in CCN, 22 November 2024
It’s been just over two years since FTX filed for Chapter 11 bankruptcy, an event that profoundly impacted the crypto landscape. The exchange, widely lauded as a model for bringing digital assets into the mainstream, left the world in shock after it emerged that millions of dollars in FTT, a token created by FTX to allow users to access discounted trading fees, was being used to prop up crypto hedge fund Alameda Research.
The resulting bank run revealed an unprecedented scale of fraudulent activity, and cemented the reputation of FTX’s Founder, Sam Bankman-Fried – a man once pictured on the same stage as Tony Blair and Bill Clinton – as one of the greatest conmen in US history.
Two years on, the scandal's repercussions continue to influence perceptions of the crypto industry, and show why today, trust and confidence remain more essential than ever.
How FTX left trust in tatters
The immediate effect of FTX’s collapse was a massive erosion of trust and a surge of skepticism towards the crypto sector. CoinCover’s own research highlights this crisis of confidence. One in five consumers became more cynical towards the crypto market following the FTX scandal, with a huge 40% associating the industry with criminality and fraud.
It wasn’t just FTX that suffered. The collapse had knock-on effects for firms like BlockFi who were also plunged into liquidity crises and bankruptcy, creating a perception of crypto as being a high-risk sector with insufficient protections.
FTX’s downfall underscored a troubling lack of transparency and for many, was a frightening alarm that even the largest crypto firms could falter.
A regulatory balancing act
In the wake of the FTX scandal, regulators worldwide have stepped up their efforts to create frameworks to bring greater oversight and transparency to crypto.
The EU has taken the lead in this transition with the Markets in Crypto Assets (MiCA) regulation, one of the most comprehensive regulatory frameworks for digital assets. Asia-Pacific jurisdictions like Singapore, and emerging Middle Eastern hubs like Dubai, have also been early movers in bringing regulatory clarity to cryptocurrencies.
Effective regulation targets specific areas – such as anti-money laundering protocols, capital reserve requirements and third-party risk assessments of crypto companies – without applying blanket restrictions that stifle the growth of the crypto market. For instance, requiring exchanges to demonstrate proof of reserves, undergo regular audits and implement adequate safeguards to protect the security of clients’ assets can improve governance without hindering their ability to grow and launch new services.
A targeted and proportionate approach will allow regulators to address the most significant risks while fostering an innovative crypto ecosystem.
Building long-term trust and confidence
Regulation, however, isn’t a silver bullet. Trust is the foundation for the adoption of any emerging financial technology, and beyond regulatory mandates, crypto firms have a responsibility to proactively evidence to investors that their funds are safe and secure.
Given crypto’s decentralised and global nature, where crypto firms operate in geographies without clearly defined crypto regulations, the onus is on them to behave as if they’re regulated, adopting traditional finance’s best practices around governance and risk management.
Building long-term confidence requires a cultural shift within the industry. Rather than an operational overhead, crypto firms should view investing in fraud prevention, compliance and security as a competitive differentiator to attract new investors. Companies that demonstrate a commitment to these standards will be better positioned to gain the trust of more cautious, risk-aware users – the next wave of new entrants to the market, vital to its growth.
Despite the challenges, the short 15-year history of crypto is still impressive, with exceptional growth and a rapidly maturing sector. The demand for digital assets is increasingly strong, and the number of people holding cryptocurrency globally is set to reach 1 billion by 2030. Crypto’s role in facilitating cross-border payments and better financial inclusion is gaining traction, and boosting the asset class’s popularity with investors. Our own research supports this trajectory, finding that a third of consumers in the UK and US are either likely or extremely likely to invest in crypto.
To secure its future as a credible alternative to traditional finance, the crypto industry must take onboard the lessons from the FTX scandal and adopt measures that protect its users and investors from the governance and fraud risks inherent in such a new sector. Traditional finance’s stability and degree of regulatory oversight didn’t happen overnight, or by chance. A similarly sophisticated regulatory approach will play a key role in protecting crypto investors, but is not a panacea. In parallel, crypto firms must proactively foster greater transparency, responsible risk management practices and security measures.
Above all else, the collapse of FTX was a story dominated by a lack of integrity and governance, and this is what crypto firms must address to lay the foundation for sustainable growth. If these elements become engrained in the crypto landscape, we can expect adoption to surge in the years ahead.