Question: How do financial rules work when rogue individuals run companies? Answer: Not very well.

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The cryp­tocur­ren­cy exchange went from a US$32 bil­lion com­pa­ny to bank­rupt­cy court in a mat­ter of days, draw­ing com­par­isons with the col­lapse of ener­gy giant Enron Corp. in 2001 and the finan­cial fraud run by mon­ey man­ag­er Bernie Mad­off until 2008.

If FTX is seen as the Wild West of cryp­tocur­ren­cy and hence the reg­u­la­tor sher­iffs need to move in and stamp their author­i­ty on the cryp­to cow­boys, how is it explained that Enron and Madd­off ran their cor­rupt enter­pris­es with the full bless­ing of reg­u­la­tors for decades?

“It is impor­tant to remem­ber that the Bernie Mad­off Scam, Enron, Lehman Broth­ers, Bear Stearns col­lapse all hap­pened in the US, one of the most well-reg­u­lat­ed finan­cial mar­kets in the world,” Rajagopal Menon, Vice Pres­i­dent of WazirX, India’s largest cryp­to exchange by trade vol­ume, told Forkast via email. 

“Reg­u­la­tions are guardrails that can pro­tect, but as the above exam­ples have proved, you can not leg­is­late or have reg­u­la­tions for human greed and temp­ta­tion,” he added.

These sen­ti­ments were echoed by Ethereum co-founder Vita­lik Buterin, who told Bloomberg in an inter­view that the FTX col­lapse was a “huge tragedy.” But added that it also con­firmed the view of many in the cryp­tocur­ren­cy indus­try about the inher­ent weak­ness­es with­in cen­tral­ized orga­ni­za­tions, such as FTX, with decen­tral­iza­tion seen as the mantra of ear­ly blockchain devel­op­ers to pre­vent con­trol by monopolies.

“Many in the Ethereum com­mu­ni­ty also see the sit­u­a­tion as a val­i­da­tion of things they believed in all along; cen­tral­ized any­thing is by default sus­pect,” he said.

Rules required

Still, clear­er reg­u­la­tions, stan­dards and rules on trans­paren­cy are seen by many in and out­side cryp­tocur­ren­cies as part of the answer to cor­po­rate malfeasance.

Matt David, Chief Com­mu­ni­ca­tions Offi­cer at Sin­ga­pore-based exchange, told Forkast the firm will be work­ing close­ly with reg­u­la­tors for the sake of the indus­try and called on oth­ers to do the same. 

“We also want strong reg­u­la­to­ry stan­dards on mar­ket integri­ty and investor pro­tec­tion,” he said. “In the absence of new leg­is­la­tion focused on this, we will work with our peers on increas­ing trans­paren­cy to rebuild trust and make 1:1 reserves the norm.”

But soon learned trans­paren­cy can bring con­tro­ver­sy. Its first pub­lished dash­board of its assets showed the sec­ond largest cryp­tocur­ren­cy it held after Bit­coin was the noto­ri­ous­ly volatile meme token Shi­ba Inu, accord­ing to blockchain ana­lyt­ics plat­form Nansen.

Binance Glob­al Inc., the world’s largest exchange, also announced it was mov­ing to pub­lish its proof of reserves even before FTX declared bank­rupt­cy, with chief exec­u­tive offi­cer Chang­peng Zhao pledg­ing “full trans­paren­cy” when he tweet­ed the announce­ment.

Speak­ing at an event dur­ing the G20 sum­mit in Indone­sia, Zhao echoed David’s calls for clear­er, stan­dard­ized rules.

“We do need some reg­u­la­tions, we do need to do this prop­er­ly, we do need to do this in a sta­ble way,” Zhao said, while acknowl­edg­ing the indus­try also bore respon­si­bil­i­ty. “The indus­try col­lec­tive­ly has a role to pro­tect con­sumers, to pro­tect every­body. So it’s not just regulators.”

As part of this com­mit­ment, Binance announced it was launch­ing an indus­try recov­ery fund to assist com­pa­nies caught in the contagion.

Respond­ing to crit­i­cism that these plat­forms could have been pub­lish­ing proof of reserves all along, Jerome Wong, Co-founder & Chief Busi­ness Offi­cer at Web 3 ven­ture stu­dio, Ever­est Ven­tures Group, told Forkast it was sim­ply not in the cul­ture to do so but that has now changed.

“Reg­u­la­tion is not clear yet,” he said, “[but this is] an alarm­ing call for the indus­try to set up a stan­dard even though the reg­u­la­tions are too slow to pick up. But then some key indus­tri­al play­ers have to set up some sort of stan­dard to make peo­ple abide by.”


Oth­ers in the indus­try say Decen­tral­ized Finance (DeFi) is already point­ing the way, despite its rep­u­ta­tion as being a Wild West and for hacks. 

“FTX was prob­a­bly one of the most reg­u­lat­ed com­pa­nies on the plan­et in terms of all the juris­dic­tions they oper­ate in and com­pli­ance require­ments — you have one of the most heav­i­ly reg­u­lat­ed enti­ties on the plan­et that still ends up los­ing cus­tomer funds,” said Lach­lan Feeney, chief exec­u­tive offi­cer and founder of Aus­tralian blockchain devel­op­er, Labrys Group Pty.

DeFi pro­to­cols are the vic­tim of large-scale hacks, espe­cial­ly on what’s known as “cross-chain bridge” pro­to­cols that allow dif­fer­ent cryp­tocur­ren­cies to be trans­ferred between each oth­er. But rarely do they col­lapse due to poor inter­nal man­age­ment or alleged wrong­do­ing, he said.

An August report by blockchain ana­lyt­ics firm Chainal­y­sis esti­mates that US$2 bil­lion worth of cryp­tocur­ren­cy has been stolen from cross-chain bridges across 13 attacks up until that point in the year, account­ing for 69% of all stolen funds in the industry.

“The rea­son why we haven’t seen that much sys­tem­at­ic fail­ure in DeFi is because every­thing is trace­able on chain,” Igneus Ter­renus, direc­tor of pub­lic liai­son at cryp­to incu­ba­tor Davion Labs, told Forkast in an interview.

“Not to say that Defi is per­fect because the vast, vast major­i­ty of exploits do hap­pen on DeFi. But they are also very, very trans­par­ent in a way you can say, ‘Oh, per­haps a lot of things hap­pen in CeFi [cen­tral­ized finance] and it just nev­er got reported.’”

How­ev­er, Ter­renus added that DeFi isn’t nec­es­sar­i­ly a good in and of itself, DeFi pro­to­cols need real world utility.

“I def­i­nite­ly want to see more of a move­ment into decen­tral­iza­tion,” he said. “[If] it serves to pro­vide bet­ter secu­ri­ty, bet­ter trans­paren­cy, for bet­ter par­tic­i­pa­tion, all of these are virtues. But if some­one just comes along and says, ‘hey, my pro­to­col is decen­tral­ized’ but it doesn’t do any­thing, then I don’t think it should auto­mat­i­cal­ly be classed into the good column.”

Wong told Forkast that trans­paren­cy with­in DeFi fos­ters a trust­less and cred­i­ble envi­ron­ment for users in the long run.

“Smart con­tract risk is def­i­nite­ly a risk, but as the tech­nol­o­gy itself matures, we think that the risk is less­ened as com­pared to coun­ter­par­ty risk,” he said. 

“Because coun­ter­par­ty risk is an immi­nent risk, it’s always there, and there’s just no way for you to do due dili­gence on the integri­ty of the man­age­ment at all.”

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