How the collapse of FTX is changing the cryptocurrency industry
The recent bankruptcy of the FTX exchange shook the industry. The founder of the exchange, Sam Bankman-Fried, is under surveillance by Bahamian authorities and has tried to get to Dubai. Comments on the style of running a business do not stop. But could we expect a different approach to business from a man who has such a loose approach to life?
A lot of information is emerging that sheds more light on what was going on at FTX and in the private life of Sam Bankman-Fried. First of all, he graduated in physics and mathematics from the Massachusetts Institute of Technology. He moved in with about ten roommates in a penthouse in the Bahamas, became a vegetarian, and his favorite pastime is playing League of Legends. He is also known for not paying attention to his clothes. In the 2020 election, he supported Biden with $5.2 million, making him the second largest individual donor in this election cycle. He actively supported Democrats in the 2021–2022 election cycle with $39.8 million. What’s more, he also had a great influence on the regulations, laws and projects created at that time.
On November 11, Sam Bankman-Fried resigned as CEO of FTX, just after bankruptcy proceedings were opened. Until recently, it was an example of spectacular success on the cryptocurrency market. Now, the exchange he created has a balance sheet of minus $8 billion.
As a result of this crypto scandal, other exchanges began to change their regulations to make their actions more credible to clients who have already entrusted or are about to entrust their assets to them. Binance recently approved a solution called Proof of Reserve (PoR). As the name suggests, it is an external audit that will show with unquestionable certainty that it holds assets held on behalf of its clients. The audit aims to create a connection tree — Merkle, it is a cryptographic scheme where each “leaf” and node is marked with the cryptographic hash of the data block. This is to verify all processed data between computers. The Merkle data snapshot is unique and shows the state of the tree at the time it was created. The auditor confirms the ownership of the addresses by collecting signatures and then verifies the value of the balances. In order to fully confirm the credibility of the exchange, the client’s assets should be kept in full reserve. Kraken, Bitmex, Coinfloor, Gate.io and HBTC have so far undergone such audits.
Although the community of cryptocurrency users shows a very positive mood towards this type of audits, experts see abuses that may occur. First of all, the falsification of the audit by fraudsters and the ongoing control of all cryptocurrency exchanges. As well as “borrowing” assets between exchanges to show a sound financial book for the time of the audit. The audit methodology itself may also prove to be a problem, as there are no formal rules yet and procedures may differ between exchanges. There is one more problem if we take into account the data provided by stock exchanges — assets without disclosed liabilities do not give a full picture of the facts.
That is why education in the field of security in the cryptocurrency industry, knowledge about the tools and opportunities they give users is so important. Nevertheless, the step of the exchanges towards an audit should be appreciated because thanks to it, the cryptocurrency environment will regain at least partly public trust.
