The collapse of FTX sent shockwaves throughout the crypto space, triggering the downfall of some crypto firms and prices crashed along with it. However, the market is picking up once more and confidence is returning.
Bitcoinist caught up with Bitrue’s Chief Strategy Officer, Robert Quartly-Janeiro and he shared his thoughts on how crypto exchanges have been faring in the wake of the FTX decline, and how Bitrue is working to regain user trust after this.
Bitcoinist: Can you tell us your thoughts on the whole FTX debacle? Do you think this was preventable?
Robert Quartly-Janeiro: Ironically, I read the insider story in the Financial Times on the final days at FTX not too long ago. It makes for grim reading, although Ryne Miller is a consummate professional. FTX was operating way outside of its remit, and if you are on the road of embezzling money, as they did through Alameda trading, then, eventually, you’re going to hit a bump.
Could it have been avoided? Yes, of course, it could — and should have been — by not doing it in the first place. I feel for FTX users and their losses, but also for the majority of staff who clearly had no idea what was going on, as well as what kind of implications it would have for their careers and money-wise.
Q: Since FTX went bankrupt, how have exchanges fared during this time?
A: During the past months, we saw firms closely tied to FTX falter, which resulted in crypto price reverberations and negative media coverage. For a time, there was a lot of guesswork on ‘who’ll be the next?’ As another top exchange went under as their trading volumes fell and the cost of debt rose, comments were made. However, things calmed down over time. Arguably, Binance’s deal for SEBC (Sakura Exchange Bitcoin) played a big part here, as it demonstrated that major deals are still being struck, and FTX’s issues remain FTX’s.
While the market has recovered, many exchanges keep operating cautiously, de-risking, and being more frugal. I expect consolidation to continue owing to the economies of scale, trust, and market moves.
Q: Presently, crypto exchange users are understandably wary of leaving their funds on CEXes. Is there a way that exchanges can regain this trust, and what exactly is Bitrue doing to win back user trust?
A: The wariness is understandable. It’s incumbent on all CEXs to be strong custodians of funds if they want to be taken seriously, or they would lose this part of the market — in a sense that it’s a question of choice. For investors, there needs to be a distinction between crypto exposure that moves in value and fluctuations in fiat’s real-time FX prices, which gives importance to stop-loss trades. A lot has been said about Proof of Reserves (PoR), but I think accurate leverage ratios would be more valuable. As businesses, CEXes of significant volume, customer base, and revenues need to set the tone.
Although forthcoming regulations in various countries will protect investors’ assets in a way not dissimilar to banking or asset management, it needs to be financially viable. For instance, registering in some countries would cost millions, which is not good, as registered exchanges will have higher cost bases and trading fees. That creates a divergent problem, as the pandemic made us more fluid in terms of where we can live, work, and trade. Equally, it would be interesting to see how people would look to store their crypto assets as central bank crypto wallets are created.
At Bitrue, we are doing several things to win back user trust. First, in 2020, we established an insurance fund with mainly XRP- and BTR- denominated tokens to safeguard users’ assets in the event of a security breach. (You can find more details in this article.) Second, we undertake penetration testing on an ongoing basis to ensure wallet security. Third, Bitrue has limited the amount of leverage individuals investors can use. And fourth, a PoR audit will be conducted by external auditors. Beyond that, there’s the need to develop more infrastructure, ensure high standards, and maintain open communication and transparency.
Q: Do you see user trust returning anytime soon to what it was before the FTX decline?
A: Exchanges have already regained trust to some extent. The fallout from FTX was contained and didn’t affect any organizations but those heavily tied to it. Yes, lots of people got financially burnt for reasons beyond the market — that’s not okay — but many crypto investors use more than one exchange.
With renewed confidence in the global economy, both equity and crypto markets are rising, and the trading volumes and the amount of money put into exchanges are also increasing.
Stepping back, FTX was one exchange, led from what I’ve read by a dozen or so people who knew what was going on. During the past year, 25 to 30 other exchanges closed, yet 250 ‘recognized’ exchanges of various sizes and quality remain, which is a lot.
You see, CEXes have to manage financial risks and market moves accordingly. As the old saying goes, ‘Don’t put all your eggs in one basket.’ FTX-Gemini exposed the need for better risk management, tighter margin maintenance (margin calls), and greater visibility of how heavily market moves, firms, and exposure are correlated: all those aspects financial markets haven’t gotten right before, during, or since 1637. Let that sink in.