BoE speculates FTT token fire sale may have sparked FTX collapse, calls for widespread regulation

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Bank of England’s (BoE) Deputy Gov­er­nor for Finan­cial Sta­bil­i­ty Jon Cun­liffe pub­lished a speech on Nov. 21, where he said that the FTX col­lapse was trig­gered by an FTX Token run and that the cryp­to space should be brought under reg­u­la­tion to offer stability.

FTX collapse and the FTT run

Cun­liffe talked about the recent FTX col­lapse and said while it is not pos­si­ble to know the full scope of what hap­pened, there have been some signs of trou­ble that reg­u­la­tors of finan­cial instru­ments could have recognized.

Cun­liffe said that the cor­po­rate struc­ture, gov­er­nance, inter­nal con­trols, lend­ing, bro­ker­ing, and set­tle­ment activ­i­ties of finan­cial insti­tu­tions are cru­cial to their health. FTX, on the oth­er hand, came short in all aspects.

Accord­ing to Cun­liffe, FTX oper­at­ed as a “con­glom­er­ate” where mul­ti­ple prod­ucts and func­tions are bun­dled with­in one firm. In a healthy tra­di­tion­al finan­cial insti­tu­tion, these func­tions and prod­ucts would be man­aged by dif­fer­ent departments.

FTX also failed to prop­er­ly con­sid­er the high volatil­i­ty of unbacked cryp­to assets and couldn’t cal­cu­late its ser­vices accord­ing­ly, which led to its col­lapse. Cun­liffe said:

“Indeed, in the FTX case, there are indi­ca­tions that it could have been a run on its cryp­to coin, FTT, which trig­gered the collapse.”

Regulation is needed

Refer­ring to the (Ter­ra) and the FTX col­lapse, Cun­liffe said:

“The expe­ri­ence of the past year has demon­strat­ed that it is not a sta­ble ecosystem.”

He argued that this insta­bil­i­ty is because of the unbacked foun­da­tion of cryp­to and the utter­ly unreg­u­lat­ed nature of the sys­tem. How­ev­er, the Deputy Gov­er­nor made no such com­ments on the nature of FIAT cur­ren­cy which also is not backed by any real-world asset.

Accord­ing to Cun­liffe, the only way to sta­bi­lize the ecosys­tem is to bring all cryp­to enti­ties and activ­i­ties with­in reg­u­la­tion. He argued that the cryp­to space should be brought under reg­u­la­tion for three reasons.

The first direc­tion is to pro­mote con­sumer and investor pro­tec­tion. Cun­liffe said that it doesn’t mat­ter if one thinks it is sen­si­ble to invest in “high­ly spec­u­la­tive assets that make up for most of the activ­i­ty in the cryp­to world,” con­sumers should be able to invest in trans­par­ent, fair, and robust marketplaces.

Cunliffe’s sec­ond direc­tive was to cre­ate a sta­ble finan­cial envi­ron­ment. He argued that the com­mu­ni­ty shouldn’t wait until it’s too late ‑like in the case of FTX- and act proac­tive­ly to pre­vent such dis­as­ters before they occur.

Final­ly, Cunliffe’s third ratio­nale for bring­ing cryp­to space under reg­u­la­tion was to fos­ter inno­va­tion. He claimed that inno­va­tion might start in unreg­u­lat­ed areas but will only be devel­oped and adopt­ed at a large scale with­in a framework.

He said:

“By hold­ing inno­v­a­tive approach­es, using tech­no­log­i­cal advance, to the same stan­dards as exist­ing approach­es we can ensure that the ben­e­fits of new tech­nol­o­gy and new busi­ness mod­els actu­al­ly flow form inno­va­tion rather than from reg­u­la­to­ry arbitrage.”

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