The crypto world must be made safer for investors and users
The writer is an independent financial commentator
The sudden collapse of the crypto exchange FTX raises serious questions about the state of the crypto ecosystem. Without serious changes in the way it works, it is hard to see how it could even become part of the existing mainstream financial system, let alone replace it as some would like to see.
The crisis at FTX, and before that crypto lender Celsius, Voyager, hedge fund Three Arrows Capital and digital tokens terraUSD and luna, has little do with cryptocurrency as a technology. Rather, it exposes what financial systems look like when there are insufficient checks and balances. Crypto people rail against central banks and regulators, but they exist for good reasons.
FTX is far from the first crypto company to fall amid token collapses, bank runs and allegations over the use of customer funds. The recent failures of Celsius, Voyager, and in 2021 the crypto lender Cred, show similar characteristics. Underlying these failures are four major weaknesses in the crypto ecosystem:
• Interconnectedness between companies in the form of opaque crossholdings and circular lending practices such as rehypothecation. Rival crypto exchange Binance had a substantial holding of FTX’s native token, FTT. When it announced that it would sell its holding, it sent people scurrying to sell FTT themselves and pull their funds from FTX.
This story originally appeared on: Financial Times - Author:Frances Coppola