FTX bankruptcy will strengthen cryptocurrency’s search for meaning

By Arthur de la Brunière, Web3 Analyst, EY Fabernovel.

While October was already marked as the month with the most hacks of protocols, with about 760 million dollars stolen, the famous “cryptosphere” finds itself once again weakened. As a reminder, the cumulative total of cryptocurrency hacks in 2022 reaches $2.98 billion, a record.

This new cataclysm leaves speechless an ecosystem that was apparently built around one of the main exchange platforms in the market, as well as its founder Sam Bankman-Fried, the “effective altruist” heavily involved in American regulation and the privileged interlocutor of federal authorities . It comes on the heels of the setbacks of Terra (LUNA) and Celsius, plunging the sector into a crisis of confidence and usage more than a liquidity crisis in a carried market.

Centralized Exchanges (CEX): “not your keys, not your crypto”

Centralized exchanges (CEX) are a good first entry point into the cryptocurrency market. Indeed, they are easy to use and regularly offer offers to their investors, as well as a wide selection of cryptocurrencies.

However, like traditional banks, they pose a risk to users in the event of a crisis: if everyone seeks to withdraw their money from an exchange at the same time, and that exchange has placed its users’ funds elsewhere – or worse, has lent its subsidiary Alameda Research for quantitative trading, going against its legal commitments – the exchange can no longer cover all withdrawals and is forced to block them.

However, double trouble in the case of FTX: in the new token economy, users who hold FTT, the FTX token, are part of the platform’s investors. In Web3, scaring its users is scaring its investors, thus seeing the value of the token melt and, in the case of FTX, its equity.

To avoid exposure to this type of illiquidity risk, experts regularly advise to remove your cryptocurrencies from platforms where the client – ​​individual or company – has no control over their assets. Not your keys, not your crypto.

FTX, a “too small to save” platform?

Although these centralized platforms are very similar to traditional banking players, one big difference remains: these CEX platforms are not “too big to fail”, or even, not big enough to be saved, either by private investors or even from the public ones. Indeed, if Greek banks had been forced to limit or block withdrawals in June 2015, as FTX had to do a few days earlier after its links to Almeda Research were revealed, some might have been helped, others not.

But the comparison stops there, because while the liquidity crisis appears to have been the first domino in FTX’s bankruptcy, the subsequent investigations point to a much more serious global and massive fraud on the part of Sam Bankman-Fried.

Towards the need to build a sustainable ecosystem

This event will surely accelerate the market regulation needed to ensure those who are still trying to build a sustainable ecosystem (#BUIDL) regardless of the context.

But this crisis of confidence, whether of users, companies or investors, can only really be overcome by trying to move in a more sensible direction. Jeremy Allaire, founder of open source platform The Circle, explained in a tweet on Nov. 8 that “it is imperative that we move decisively from the speculative phase of cryptocurrencies to the “utility value” phase, and this must be anchored in radically more open and transparent practices. The good news is that the foundations that have been built with crypto infrastructure and public blockchains give us the building blocks to develop financial services with radically greater transparency than we have experienced so far. »

The search for the democratization of more virtuous and transparent uses (subject of a study by EY Fabernovel and Arbevel ” Web3: 5 Potentially Virtuous Uses ”) should leave room for speculative uses.

To name just two examples of the technological maturity of the sector: Ethereum succeeded, without causing a media wave, its large merger towards a protocol that consumes much less energy, and the utility and efficiency of blockchain technology when used in a public. the way is no longer to demonstrate, in terms of data sharing, transparency and security. Conversely, this news once again highlights the irrational uses of a technology for which speculation and fraud are the nerve center.

Besides, we have to take a step back since the comparisons the headlines make represent different scales. When Lehman had $639 billion in assets shortly before it became the world’s largest bankrupt, FTX reportedly reported between $10-50 billion in assets, a rate more than 12 times lower than Lehman’s highest estimate. Likewise doing the exercise with the high valuation of FTX at $32 billion, comparing it to the market capitalization merger of nearly 20% of the four GAFAs combined over one quarter, between August 20 and November 17, 2022, which represents $1.215 billion. .

Position yourself as a business

To undertake projects related to NFTs or cryptocurrencies, companies must first start with the basics: sufficient knowledge of the subject and risk control – financial, legal, tax, reputational… Due diligence should enable the selection of strong partners. ; an operational model adapted to Web3 must be established to build its projects while maintaining control of its assets and to switch between centralized exchanges and internal management.

Another final note of press analysis that can be found on Finyear: Tech is not dead

About the author: Arthur de la Brunière, Web3 Analyst, EY Fabernovel
Arthur is a Senior Web3 Analyst at Fabernovel EY, he supports companies in their innovation transformation, participates in gathering companies on these new Web3 topics and analyzes the cryptocurrency market. He is also responsible for research and development related to the Web3 ecosystem within EY Fabernovel experimenting and testing blockchain, smart contracts and NFT technologies and real-time use cases.

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