FTX: Europe's Crypto Lessons One Year On

• Anniversary of FTX's Bankruptcy: A Retrospective
• Implications for Crypto-Asset Market Regulation
• Lessons Long Learnt
• Brussels Policymakers' Take
• Unanswered Questions and Unlearnt Lessons

Anniversary of FTX's Bankruptcy: A Retrospective

November 11 commemorates the anniversary of when FTX$3.28 -5.38% officially filed for bankruptcy, a crucial moment followed shortly by the conviction of Sam Bankman-Fried on all criminal charges, leading to his lifetime imprisonment. The trial's significance varies depending on perspective. Some perceive it as a form of validation for policymakers who once trusted SBF, allowing them to feel that justice has been served and move forward. Conversely, others view the FTX fiasco as an exposure of the crypto market's vulnerabilities, sparking a concern that the market may never fully recover.

Implications for Crypto-Asset Market Regulation

All these interpretations seem overly simplified. A properly regulated crypto-asset market could enable policymakers to attract more risk-averse and institutional capital to the asset class. While it's true that FTX's downfall heightened regulatory conversations globally, making them seemingly confrontational, the crypto industry must assure how it can prevent an FTX-level disaster. This is especially necessary in major financial sectors like London, Brussels, and various international forums.

Lessons Long Learnt

Most of the crypto industry agrees on the solutions - suitable authorization, adequate custody, and appropriate client asset segregation. These are fundamental principles of running an investment business, and there's little dispute about them. The shift many exchanges are making towards proof-of-reserves largely supports client asset segregation, despite its limitations as an accounting method. By 2023, exchanges in markets with robust regulators are eager to be seen as accountable.

Professionals with a background in financial services view this as a natural progression, not a radical change. The FTX crisis merely accelerated the realization for service providers who may have had second thoughts.

By November 2022, such requirements were already being implemented in the EU under the Markets in Crypto-assets Regulation (MiCA). When the FTX saga unfolded, these regulations were already in effect. Any subsequent updates to MiCA are part of the lengthy administrative process preceding the publication and application of EU rules.

Brussels Policymakers' Take

Policymakers in Brussels have spent the past year assuring themselves and the world that their upcoming rulebook would have averted an FTX-style collapse. To a large extent, this is accurate and it needs to be, given that the part of MiCA safeguarding exchanges will not be reviewed for another five years or so. The perception of it being outdated is unacceptable.

Unanswered Questions and Unlearnt Lessons

The biggest disagreement FTX left behind revolves around the value and purpose of the crypto-asset market, considering its evident risks. While it's easy to claim that regulators shouldn't hinder market innovation as long as it's safe, we must acknowledge that creating and implementing safety rules is a colossal task.

Blaming regulators for lack of knowledge is no longer valid, as many authorities worldwide are well-informed about the industry. However, endorsing an industry requires political justification, making it crucial to answer the question of its societal value.

Most industry responses revolve around disintermediation and decentralization, the core promises of blockchain technology. However, from a regulatory perspective, these concepts imply evading responsibility and maintaining anonymity, which will soon include inability to determine a carbon footprint. Even as EU authorities aim to curb Web2's natural monopolies, a decentralized Web3 isn't seen as the solution in power corridors. The potential cost of an anonymous and unregulated DeFi ecosystem is deemed too high.

To move beyond this dichotomy, the industry might need to decouple non-custodial services and anonymous services. This suggestion may be contentious as it touches upon the core reason for crypto's creation. However, advocates can more easily explain how the technology letting users control their funds and data isn't the same technology facilitating money laundering and terrorism financing.

Edited by Jonathan Stoker