FTX case and its implications for the Crypto Market future

The FTX complications are terrorizing the investors, and also bringing a lot of attention to the Crypto Market. This event will bring a lot of new behaviors from the economic agents, including more regulations.

Everything began with a report from CoinDesk, a news source, about problems and leaks in the balance sheet of Alameda Research, a related company of FTX. Then, FTX was contaminated with this claim because of the use of FTT (native FTX token) in the balance sheet of these two companies.

When things were moving supposedly in a good direction, Sam Bankman-Fried (SBF), FTX CEO, entered into a failed negotiation with Binance to sell FTX. Then, in a series of quick events, the FTX token (FTT) had its price diminished, FTX had a “bank run” and halted withdrawals from clients, discovered to be without client funds (between USD 8 B to USD 10 B), had exchange wallets hacked (USD 500 M), filled bankruptcy in the US (Chapter 11) alongside with FTX US brand, and exposed having malfeasance use of client funds.

Below is a more detailed image of the SBF Universe of companies related.

Some other claims from people inside this event are weak or absence of security protocols and exemption of Alameda Research from FTX trading policies; remembering that Alameda Research CEO is the ex-girlfriend of SBF.

This summary of events is necessary to understand why some consequences will appear in the Crypto Market. Some sectors will have changes spontaneously and others with regulations, because now regulators have more material to work on and to condemn the Crypto Market.

The first consequence is more healthy protocols from Centralized Exchanges (CEX), some of which can be inspired by the Basel Accords of bank activity. Proof of reserves is an example of necessity with companies that have custody of client’s funds.

Changpeng “CZ” Zhao, Binance CEO, made a good list of six commitments for good CEX in the crypto scenario: 1. Be risk averse with user funds; 2. Never use native tokens as collateral; 3. Share live proof of assets; 4. Keep strong reserves; 5. Avoid excessive leverage; 6. Strengthen and enforce security protocols.

The second consequence is the strengthening of the Decentralized Finance (DeFi) sector, where intermediaries, like a CEX (which can be manipulated by CEOs or other bad actors), are substituted by decentralized agents, as a Decentralized Exchange (DEX).

The third consequence is more regulation in the Crypto Market. Some regulators around the world will be after CEXs to regulate accordingly to the US regulations. Like it or not, the clients from the US FTX were protected because of some of these regulations. Other regulations will appear to benefit government and related agents too.

In a new market, it is common the presence of errors and failures like this, but this is not a market mistake, this is a healthy process toward a more secure, less volatile (remember that volatility is the perception of value from economic agents), and autoregulated (without a government) market. So, FTX was bad for a lot of people, but it was good from the perspective of the market itself.