latest Friday updates and commentaries

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As the FTX liq­uid­i­ty cri­sis unfolds, there are grow­ing fears of a con­ta­gion sim­i­lar to that fol­low­ing the Ter­ra-LUNA col­lapse back in May. Cryp­to lender Block­Fi announced on Twit­ter Fri­day that it is halt­ing with­drawals cit­ing the “lack of clar­i­ty” on the sta­tus of FTX and Alame­da Research. U.S. finan­cial reg­u­la­tors such as the Secu­ri­ties and Exchange Com­mis­sion (SEC) and the Com­mod­i­ty Futures Trad­ing Com­mis­sion (CFTC) have begun their probe on the embat­tled exchange, while the state of Cal­i­for­nia has com­menced an inves­ti­ga­tion of its own.

Comments made on Friday include:

Ben Caselin, vice pres­i­dent of AAX exchange and head of AAX Trends, told Forkast that exchanges need to put more con­sid­er­a­tion into their oper­a­tions in prepa­ra­tion for post-FTX:

“We need to pay very close atten­tion and map out: who are the investors in FTX, what are their hold­ings and what’s their cur­rent risk pro­file. So, there’s a bunch of exchanges. There’s a bunch of, I think there’s a teach­ers’ pen­sion fund in Ontario, a bunch of play­ers have come in and have gained expo­sure to FTX’s assets or tokens. It’s not real­ly about judg­ing whether that was right or not. This is real­ly about, how do we real­ly think about the future of this space.

“Per­haps we should change the way that we oper­ate. Now, on the exchange side, you could see already Binance is call­ing for proof of reserve. I think Bit­MEX has come out with some­thing and AAX is explor­ing proof of reserve. So I think this is a good devel­op­ment. But again, we need to see what does it mean to be trans­par­ent in this space? Do users actu­al­ly want to be exposed to that type of infor­ma­tion? You hold your hold­ings on an exchange, do we want that type of trans­paren­cy or is it more about oth­er mech­a­nisms that we can that we can sim­ply prove almost with zero knowl­edge, sim­ply prove that we have the reserves, we have the funds. So this is some­thing that all exchanges need to fig­ure out at the moment.”

Sher­rod Brown, a Demo­c­ra­t­ic Sen­a­tor from Ohio and chair of the Sen­ate bank­ing com­mit­tee, called for reg­u­la­tion and an inves­ti­ga­tion into FTX’s “mis­con­duct and abuses”:

“The recent col­lapse of FTX is a loud warn­ing bell that cryp­tocur­ren­cies can fail, and just like we saw with over-the-counter deriv­a­tives that led to a finan­cial cri­sis, these fail­ures can have a rip­ple effect on con­sumers and oth­er parts of our finan­cial system.

“The cryp­tocur­ren­cy market’s con­tin­ued tur­moil is why we must think care­ful­ly about how to reg­u­late cryp­tocur­ren­cies and their role in our economy.

“It is cru­cial that our finan­cial watch­dogs look into what led to FTX’s col­lapse so we can ful­ly under­stand the mis­con­duct and abus­es that took place. I will con­tin­ue to work with them to hold bad actors in cryp­to mar­kets account­able. I’m com­mit­ted to find­ing the best path for­ward to pro­tect con­sumers and the sta­bil­i­ty of the U.S. mar­kets and bank­ing system.”

Bradley Duke, founder and co-chief exec­u­tive offi­cer at ETC Group, said it’s evi­dent that the capac­i­ty of a cryp­to com­pa­ny does not ensure pro­tec­tion of client assets:

 “The fact that Binance explic­it­ly cites “mis­han­dled cus­tomer funds” in their tweet explain­ing the deci­sion to aban­don their acqui­si­tion of FTX.com sug­gests, at a min­i­mum, a lack of dis­clo­sure and trans­paren­cy on the the part of FTX or worse, putting cus­tomer deposits at risk for busi­ness bets FTX was making.

“We will know the full truth in time but what is clear is that even some of the largest com­pa­nies in cryp­to are fail­ing to ring-fence and pro­tect cus­tomer assets and give the req­ui­site trans­paren­cy about deposits in custody.”

Mikkel Morch, Chair­man at EU-based alter­na­tive invest­ment fund ARK36, said the cryp­to indus­try needs to take the chance to do some soul-searching:

 “With reports that FTX is fac­ing inves­ti­ga­tions from the SEC, the CFTC, and the Depart­ment of Jus­tice, yet anoth­er sup­pos­ed­ly rep­utable and trust­ed indus­try play­er goes down as a huge dis­ap­point­ment, to put it mildly.

“Despite all the talk about the mat­u­ra­tion of cryp­to, it seems like now more than ever the indus­try is due for some soul-search­ing … There are some pos­i­tive changes hap­pen­ing already. Binance is push­ing for major exchanges to adopt proof of reserves as an indus­try stan­dard. Some have already start­ed pub­lish­ing it. New­com­ers to the space are dis­cov­er­ing the impor­tance of self-cus­tody of their assets. And investors are learn­ing the hard way the advan­tages of work­ing with prop­er­ly reg­u­lat­ed enti­ties. These are the grow­ing pains of a nascent indus­try – but cryp­to will come out of this stronger and more resilient than ever before.”

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