Disclaimer: The opinions expressed in this article are solely those of the author and do not reflect the views of the editorial team at crypto.news.
The aftermath of the FTX collapse and the ensuing media frenzy caused unexpected and far-reaching disruptions. However, it accelerated the realization that centralized exchanges (CEXs) are flawed. How we navigate this situation will have a lasting impact on our industry. Regulators should not be solely responsible for preventing another FTX collapse.
In the absence of substantial changes, history may repeat itself in this new monetary system. Our industry and innovative technologies must demonstrate to the world that compliant decentralization is achievable.
Compliance is the first step. The FTX incident underscores the dangers of neglecting corporate compliance. It underscores the need for enhanced compliance measures. A robust framework is essential for CEXs, given the loss of nearly $9 billion in customer funds from the troubled exchange. This framework will establish trust and security to facilitate industry growth.
In a post-FTX era, emphasis must be placed on compliance and transparency. Corporate governance, including cash controls, HR protocols, approval processes, financial reporting, and internal and external audits, is crucial.
However, improved regulation is just the beginning. Regulation alone is insufficient. Despite stringent regulations in traditional finance, failures like those of Bear Stearns, Lehman Brothers, and Credit Suisse highlight the risks of over-reliance on human intervention.
Self-custody emerges as a key lesson. Entrusting private keys to exchanges and third parties relinquishes control over one’s finances, as outlined in the Bitcoin whitepaper. The downfall of FTX revealed a secret backdoor that allowed Alameda Research to withdraw billions of customer funds, amplifying losses during market downturns.
The collapse of FTX, once a reputable exchange, led to unforeseen consequences and highlighted the risks of centralized exchanges. Customers mistakenly believed their funds were protected from speculative activities. The importance of self-custody became evident as several platforms halted withdrawals abruptly due to potential liquidity issues.
Hybrid models offer a paradigm shift in the industry. By combining the best features of CEXs and DEXs, these exchanges provide innovative solutions with enhanced security. The trustless risk management and self-custody features of hybrid exchanges offer a potential game-changer in the crypto space.
The FTX trial serves as a wake-up call for the crypto industry. Similar scandals have plagued Wall Street, emphasizing the need for continuous evolution and improvement. The industry must learn from these incidents to enhance its reputation and move forward positively.
Hong Yea, the founder of GRVT, a self-custody crypto exchange, brings a wealth of experience from his time at Goldman Sachs and Credit Suisse.