Few were prepared for the dramatic collapse of crypto exchange FTX on November 11. The incident has left hundreds of thousands of customers without access to their funds. integrity of other crypto companies.
FTX was so deeply embedded in the cryptosphere that many companies (including cryptocurrency lenders Genesis and BlockFi) hastily calculated their own financial exposure to the collapse over the past week, fearing they would be swept up in the swell. Others, however, have seen opportunities in the crisis and are preparing plans to prevent further contagion. “We actually think this is a really good cleanup period,” Binance CEO Changpeng Zhao said during a Twitter Spaces Q&A earlier this week. “The weak projects are gone and the industry is much healthier.”
Zhao, whose name is CZ, says he has a plan to navigate the fallout from the FTX saga and rebuild confidence. With one of Binance’s main competitors out of business, the company’s voice as the world’s largest crypto exchange has become all the more influential. In a series of tweets published since November 8, CZ has announced that Binance will publish a transparent “proof of reserves”, to demonstrate that it has sufficient cash on hand to fund withdrawals, and start a recovery fund to support legitimate projects in need.
On Nov. 15, he followed up with a blog post outlining best practices for exchanges, which means no gambling, no borrowing, and no cheating. “We cannot allow a few bad actors to tarnish the reputation of this industry when it is still in its infancy,” CZ wrote.
In the past week, many other crypto exchanges have followed suit. Bitfinex, Crypto.com, Huobi, OKX, and Kucoin have all released or promised to release proof of reserves. Some, like Kraken and Coinbase, tried to emphasize that they have been publishing accounts for a while. Virtually all of them have pledged support to CZ’s recovery fund or promised further investment in crypto startups.
The mood among the exchanges is subdued but optimistic. They hope that increased transparency will allow them to continue to appeal to crypto newcomers while limiting the risk of being accused of FTX-like accounting.
“This has been a major setback for the crypto industry,” said Blair Halliday, UK managing director at Kraken, an exchange that currently processes $600 million in crypto transactions per day. “[But] we believe that sensible industry action, such as reserve evidence audits, will be a critical starting point to regain the loss of trust in the ecosystem. Similarly, Paolo Aroino, CTO at Bitfinex (which holds $100 million in daily transactions), says that only the exchanges with a track record of responsible governance will survive, but that “the cryptocurrency industry will grow stronger” from the ordeal.
However, there are industry leaders who believe that the collapse of the FTX should be seen as an opportunity for a deeper re-evaluation and a return to the core principle of the cryptocurrency movement: decentralization.
“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.