The chaos at popular crypto exchange FTX has the potential to materially damage the market for cryptocurrencies in a way that previous crypto crashes did not. The industry needs much greater and standardised transparency to regain investor trust, though Binance’s disclosure of its holdings is a good start.
As in previous scandals, the price of flagship cryptocurrencies like Bitcoin and Ether dived with the news of yet more trouble in the largely unregulated cryptocurrency markets. So far, this is par for the course when reporting on the crypto markets in 2022. However, this time the drama is focused on the industry’s second largest exchange, FTX. As of writing, the exchange appears to be insolvent and still heading for bankruptcy rather than a rescue after industry leader Binance declined to take it over.
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At the heart of the problem appears to have been the use of FTX’s customer deposits and proprietary exchange count FTE to prop up a sister trading company, Alameda Research. This mishandling of customer funds was cited by Binance as one of the reasons it could not come to the rescue. This has the potential to fundamentally damage crypto users’ trust in the exchanges that lie at the heart of most small-scale investors’ exposure to the market.
This could also cause investors to lose faith in exchanges more generally, damaging the channel that provides the great access retail investors have had to a huge range of cryptocurrencies. Without these exchanges providing the platform for easy trading, the crypto market risks becoming much more niche than it has been. This would be a huge step backwards for the asset class, which according to GlobalData’s surveying of investors had found its way into the portfolios of two out of five millennial investors in 2022, mainstream by any measure.
More exchanges need to follow Binance’s move to boost transparency with its detailed holdings disclosure on Thursday, November 10. The move should do much to calm the markets; Binance is by far the industry leader, but only regular and standardised disclosures by all crypto exchanges will truly restore confidence long term, preventing these periodic runs. Time, perhaps, for some regulation.
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