“It’s a good learning opportunity for the industry,” said Hayden Adams, creator of UniSwap, the world’s largest decentralized exchange (DEX). “The fact that [FTX founder Sam Bankman-Fried] had the ability to do [what he did] talks about the fact that he is a centralized product over which he had complete control.”
Unlike traditional exchanges, where people can trade common currency for crypto and store assets on behalf of clients, DEXs never take control of client funds and transactions are conducted on a peer-to-peer basis. According to Adams, this decentralized model eliminates the middleman risk that helped get FTX into trouble in the first place.
UniSwap is still a work in progress from a user experience perspective. “If you were to compare us to the Internet, we’re still in the dial-up era,” says Adams. But he believes that over time, DEXs will replace exchanges like Binance as the go-to vehicles for crypto trading.
None of the measures crypto exchanges are taking will avert the period of heightened regulatory oversight that is now expected to begin.
To date, efforts to regulate crypto companies have been too slow, due in part to the complexity of the underlying technology, said Charley Cooper, former COO of the US Commodity Futures Trading Commission (CFTC). But the magnitude of the FTX’s collapse is likely to spark a fire among regulators around the world.
Some have pointed out that high-profile collapses have happened multiple times in traditional finance, which could set a useful precedent for regulation in crypto. Justin Sun, founder of the TRON network and a member of the advisory board of Huobi Global, says crises in financial institutions are typically followed by “tightened regulation and supervision”. [that] served to strengthen the industry’, and that ‘it is almost certain that the virtual asset industry will follow the same path’.
The EU has been working for the past two years on a new set of laws that will apply to crypto organizations, known as the Markets in Crypto Assets (MiCA), designed to protect both consumer funds and financial stability. The details are now finalized and can be put to a vote in February 2023.
If adopted, MiCA will deter crypto firms from using accounting gimmicks to blur the line between their own money and clients’ money, an offense that appears to have played a major role in FTX’s demise. “If MiCA was enforced, [the FTX collapse] would not have happened this way,” said Stefan Berger, a German Member of the European Parliament (MEP) who is in charge of the new legislation. “The FTX case is the Lehman Brothers moment for crypto. What the cryptosphere needs right now is trust, and to build trust you need clear rules and regulatory clarity.”
Meanwhile, in September in the US, the Biden administration outlined plans to regulate the crypto industry for the first time. The new framework aims to combat fraud and ensure financial stability, while leaving sufficient room for innovation and entrepreneurship. This is a difficult balance, however, and questions remain about which regulatory body should take the lead, the Securities and Exchange Commission or the CFTC.
