“It’s a good learning moment for the industry,” says 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] speaks to the fact he was building a centralized product over which he had full control.”
Unlike traditional exchanges, which let people swap regular currency for crypto and store assets on behalf of customers, DEXs never take control of customer funds, and trades are made on a peer-to-peer basis. According to Adams, this decentralized model eliminates the middleman risk that contributed to FTX getting itself into hot water 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 era of dialup,” says Adams. But he believes that DEXs will in time supplant exchanges like Binance as the go-to vehicles for crypto trading.
None of the measures that crypto exchanges are putting in place will ward off the period of heightened regulatory scrutiny now expected to begin.
To date, efforts to regulate crypto companies have moved too slowly, partly as a result of the complexity of the underlying technology, says Charley Cooper, former COO of the Commodity Futures Trading Commission (CFTC) in the US and now managing director at blockchain firm R3. But the scale of the FTX collapse is likely to light a fire under regulators around the world.
Some have pointed out that high-profile collapses have happened multiple times in traditional finance, which could provide a useful precedent for regulation in crypto. Justin Sun, founder of the TRON network and member of the Huobi Global advisory board, says crises in financial institutions have typically been followed by “enhanced regulations and scrutiny [that] served to strengthen the industry,” and that “it is almost certain the virtual assets industry will head down the same path.”
The EU has been working for the last 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 have now been finalized and are ready to be put to a vote in February 2023.
If passed, MiCA will stop crypto companies from using tricks of accounting to blur the line between their own and clients’ funds, an offence that appears to have played a significant role in the downfall of FTX. “If MiCA was enforced, [the FTX collapse] would not have happened in this way,” says Stefan Berger, a German member of the European Parliament (MEP) who is leading the effort on the new legislation. “The FTX case is the Lehman Brothers moment for crypto. What the cryptosphere now needs is trust, and to build trust you need clear rules and regulatory clarity.”
Meanwhile, in the US, the Biden administration in September outlined plans to regulate the crypto industry for the first time. The new framework aims to crack down on fraud and guarantee financial stability, while leaving sufficient leeway for innovation and entrepreneurship. This is a difficult balance to strike, however, and questions remain over which regulatory body should take the lead, the Securities and Exchange Commission or the CFTC.