There is no shortage of drama in the crypto industry. The two shocking reversals last night and this morning made community users "nervous". The ending was disappointing, because the cryptocurrency industry, which was born in response to the Lehman Brothers moment in 2008, has gone the same way.
In the early morning of November 9th, Beijing time, when the crypto community was still predicting how the FTX incident would develop, FTX founder SBF and Binance founder CZ tweeted that the two parties had reached an agreement on strategic investment and signed a non-binding letter of intent to acquire FTX in full and help deal with liquidity crunch. However, it will still take a few days to conduct a complete due diligence, so things are uncertain, and remind users to expect FTT prices to be highly volatile in the next few days.
Influenced by this news, the prices of FTT and BNB rose by 40% and 20% respectively in a short period of time, and the overall crypto market also rebounded rapidly. However, the good times did not last long. Just as the crypto community began to discuss the Binance acquisition of FTX, the price of FTT suddenly began to fall rapidly at 1 a.m., falling to as low as $2.5, a short-term drop of 88%.
There are two main reasons for the flash crash. One is that a lawyer warned that Binance's acquisition of FTX may trigger an antitrust investigation by regulators, suggesting that the acquisition may not be completed. At the same time, foreign media Semafor also broke the news that SBF had sought more than $1 billion in aid from billionaires on Wall Street and Silicon Valley before reaching an acquisition agreement with Binance, but by noon on Tuesday, FTX's funding gap had rapidly expanded by $5 to $6 billion. PANews learned from multiple sources that the Alameda team began to borrow money from institutions from the evening of November 7, which reflected its huge funding gap, which triggered the early morning of November 8.
As more information is revealed, the truth of the matter is gradually revealed.
In fact, Alameda and FTX have reached a crisis point since the second quarter of this year. Lucas Nuzzi, head of research at CoinMetrics, analyzed on Twitter that the reason for the misappropriation of user funds may be that FTX provided Alameda with a large-scale rescue in the second quarter of 2022. Data analysis shows that Alameda was on the verge of collapse with Three Arrows Capital in the second quarter of this year. It survived because it used 17.2 million FTTs guaranteed to be released in 4 months as collateral to obtain funds from FTX. Once released, all tokens were returned as repayment.
FTT's token release unlocking contract is auto-vesting, and if FTX lets Alameda implode in May, their collapse will ensure that all FTT tokens subsequently released in September are liquidated. This would be terrible for FTX, so they have to find a way to avoid this. Alameda and FTX actually put all their chips on the table in Q2 and used the money to bail out other companies, which solidified FTX's image as a solvent and responsible institution and helped the price of FTT rise.
Now SBF and FTX are no longer stubborn. The large funding gap and the "summons" by Binance are also disguised confirmation that the FTX platform has indeed misappropriated user funds. This is why FTX does not transfer funds from cold wallets to exchanges to deal with users' large withdrawal demands, but transfers funds from various exchanges and pieces them together, because FTX places users' funds in various financial institutions.
It is not uncommon for crypto exchanges to misappropriate user funds. The earliest was the Mentougou incident, where 750,000 bitcoins were misappropriated from users. Later, Fcoin was unable to repay users 7,000 to 13,000 BTC. This year, exchanges such as Huobi and AEX were unable to repay user funds due to misappropriation of user assets for leveraged mining. Now, FTX, the world's second-largest exchange, has also taken this path due to the lack of internal risk control.
What warnings does FTX’s crisis give to the crypto industry?
Coinbase co-founder Brian Armstrong: Building a better system with DeFi and self-custodial wallets
Coinbase co-founder Brian Armstrong tweeted that the incident appears to be the result of risky business practices, including conflicts of interest between deeply intertwined entities and the misuse of customer funds (lending user assets). Coinbase believes that transparency and trust are very important. Every investor and customer can see Coinbase's publicly audited financial data, and no tokens have ever been issued.
Part of the problem here is that regulators have been focusing on the borders of their respective markets, while customers have shifted their attention to companies with more opaque and risky offshore operations. In the United States, for example, more than 95% of crypto trading has been developed overseas because crypto regulation in the United States has been difficult to navigate.
What these incidents have led to is calls for stricter regulation. This will only make the problem of crypto companies and crypto users going overseas worse. We should continue to work with policymakers to develop reasonable regulations for centralized exchanges or custodians in each market, but we need to see a level playing field operate, which has not happened so far.
In the long run, the cryptocurrency industry has the opportunity to build better systems with DeFi and self-custodial wallets that don’t rely on trusting third parties. Instead, you can trust the code or the math, and everything can be publicly audited on-chain.
Circle co-founder Jeremy Allaire: Lack of transparency, lack of clear counterparties, and mostly speculative assets
Jeremy Allaire, co-founder of Circle, the issuer of USDC, tweeted that the entire bear market cycle has given us many opportunities to reflect on the deep problems in the market. Lack of transparency, lack of clear counterparties, and project funds and balance sheets based on speculative tokens are the root causes. In the past bull market, a lot of so-called "value creation" was almost entirely speculative, and the focus on practicality was often an afterthought or completely non-existent.
At the same time, as Brian Armstrong points out, the lack of clear regulatory guidelines in the U.S. ultimately encourages users and projects to take more risks and do it offshore. In fact, offshore regulatory arbitrage has given rise to global companies with no known basis that often operate with impunity. If U.S. policymakers don't get their act together, the results will be worse.
We must decisively move from the speculative value stage of cryptocurrencies to the practical value stage, and this must be based on more open and transparent practices. The good news is that the foundation built with cryptographic infrastructure and public chains gives us the building blocks to now reinvent financial services with unprecedented transparency. I hope that as an industry we can seriously move towards more and more activity happening in DeFi and on-chain structures. To do this, we need verifiable cryptographically provable identities, as well as significant and better on-chain privacy technologies.
Hopefully, these CeFi crises won’t poison the future of distribution and decentralization, and policymakers will act quickly and carefully, which could be a huge game-changer for the world. But we shouldn’t just rave about enforcement actions — blatant fraud and manipulative and anti-competitive market behavior need to be held accountable. Markets and users are being harmed. As the industry assesses, I hope the focus will begin to shift toward building durable, high-utility products designed to run on open, on-chain infrastructure. In the end, as someone who has been in the industry for 10 years, it’s disappointing that a technology that was spawned in response to the 2008 Lehman Brothers moment has spawned its own version of the same.
Binance founder CZ: Don’t use your own tokens as collateral
Binance founder CZ tweeted that two lessons can be learned from the FTX liquidity crisis: 1) Do not use your own tokens as collateral. 2) Cryptocurrency businesses should not borrow. Do not use capital too efficiently and hold a large amount of reserves. In addition, Zhao Changpeng said that Binance has never used BNB as collateral and has never been in debt.
At the same time, CZ said that all cryptocurrency exchanges should do merkle-tree proof of reserves. Banks operate on fractional reserves but cryptocurrency exchanges should not. Binance will soon start doing fully transparent proof of funds reserves.
Ki Young Ju, co-founder of Cryptoquant, commented that after four years of tracking Binance’s wallets, they have achieved 99% transparency through several cold and hot wallets, while other exchanges mix customers’ assets with third-party wallets.
Subsequently, cryptocurrency exchanges OKX and Huobi also tweeted separately that it is critical for all major cryptocurrency exchanges to publicly share their auditable merkle tree reserve proof or POF. It is planned to release the proof in the next few weeks (within 30 days). This is an important step in establishing baseline trust in the industry.
Where is the future of the crypto industry?
The FTX incident will make it more difficult for centralized exchanges to gain trust, and will also cause traditional institutions to lose confidence in entering the market in the short term, making individual investors lack confidence and thus wait and see. There is a high probability that other related centralized finance will trigger a chain reaction.
From a pessimistic perspective, the repeated crises in the crypto industry have confirmed and deepened the stereotype of crypto scams, and have also made practitioners think and doubt whether the crypto industry is worth investing in.
But from the perspective of optimists, it is these repeated crashes and crises that are constantly pushing the crypto industry in a better direction, making the game between centralized companies and decentralized protocols more transparent, rather than simply using financial tools to issue assets, inflate bubbles, and reap profits. Such behavior will eventually backfire.
As the two co-founders of Coinbase and Circle said above, FTX’s harm to the industry is good for DeFi in the long run and for all on-chain management. In centralized finance, stakeholders set up schemes to support each other, use personalities to achieve unspeakable goals, and use information and financial advantages to short and long to harvest individual investors.
As an industry OG told PANews, Web3 needs new standards and perspectives. One of the essences of decentralization is openness and transparency. Compared with building a big boss persona, transparency is the real persona. Decentralized products are the hardcore demand of the industry. Openness and transparency are the most powerful and effective supervision. Only true transparency is the kingly way. The ultimate goal of supervision is to have no supervision. Therefore, all high-quality decentralized products have great potential.
