Why the demise of FTX has to be a turning point

The recent and very public demise of cryptocurrency exchange, FTX, has once again dented wider faith and trust in the crypto world. 

Despite raising $400 million at the start of the year, rumours of FTX being undercapitalised led to more than $650 million in withdrawals - causing it to close its doors and confirming it was in a liquidity crisis.

The fallout saw the value of the FTX’s token, the FTT, plummet, causing wider impact to the price of all other crypto currencies.

Unlike the traditional financial system, the cryptocurrency market is not regulated - a barrier few otherwise willing investors are willing to overlook. But what the crypto world could do to overcome this, is implement a more robust operational threshold, that includes increasing transparency, to ultimately build trust. 

Ironically, the tech behind FTX - blockchain - could have been utilised to help do this. Many confuse the two, meaning blockchain is often tarred by the brush of crypto so it’s important to separate the two. Crypto is a single application of blockchain technology, and the role of a crypto trade. Think of the relation between crypto and blockchain to what email is to the internet – one of many possible applications.

One unravelling fact about the downfall of FTX is that its true assets were unknown and lacked transparency. Whereas reporting and transparency in the traditional banking and financial sector is set and governed by regulators, this isn’t the case in the crypto world, leaving many to question the legitimacy of such a young industry.  

Without verified or standardised transparency the value applied to an asset is capped, especially when the market for those assets is very small. Transparency is vital not only to convey value, but in building trust around that value.

As a single source of truth, and given its immutable nature, blockchain has a role to play in achieving this. Had it been used to underpin the accounting framework of FTX, it is likely that false entries would never have been approved by the distributed ledger technology.

The time-stamped links of blocks could reveal alterations or tampering to the recorded transactions while providing real time and immediate insight into the performance of a company.

Incorporating technologies such as blockchain into the reporting and audit framework of a fund could give investors the safe and accurate information they need to make informed decisions. More validated information can generate trust in the crypto market. 

Sadly, FTX didn’t utilise the opportunity it had to establish itself as the gold standard underpinning the crypto markets. The fallout will hinder the progression of crypto but perhaps the industry can learn from this disaster and ensure a different and more transparent approach if it is to be seen as credible.