Learning from FTX crash: time for regulating Crypto and FinTech is over


FTX (and the others), story of a foretold bankruptcy: dynamics, causes and numbers

Over 100.000 creditors. Total liabilities between 10 and 50 billion dollars. Of which, about 3 billion dollars to the 50 largest creditors alone. And the already questionable credibility of an entire industry - the cryptocurrency one - more and more at risk. Telegraphically, this is how we might resume what represents the FTX crash, one of the former leaders of the cryptocurrency exchange industry, founded by Sam Bankman-Fried in 2019 and based in the Bahamas. Before the bankruptcy, declared a few weeks ago, FTX was valued at as much as 32 billion dollars. The cause of the meltdown can ultimately be traced to the lack of proper regulation of the industry. Just as has happened in previous financial crises - one above all that of 2008, from which in fact arose the needs answered by our RegTech SaaS, Daitomic. But let's proceed one step at a time. The FTX meltdown was caused by high-risk trading by Alameda Research, a company started by the founder of FTX himself, which could trade cryptocurrencies on the FTX platform itself, obviously exploiting preferential information unknown to other traders, in an illicit way. The result was a situation similar to the one that - in an entirely different sector - hit Goldman Sachs in 2013: FTX was unable to pay investors the 5 billion dollars they demanded. And FTX crash, according to many experts, has only raised a pandora's box whose contents will shock the cryptocurrency market. Indeed, there is also very recent news about Kraken, Bittrex Inc. and Genesis Global Capital, three other leaders in the cryptocurrency exchanges world. Starting with the former, the most recent news is Kraken's choice to pay the U.S. Department of Treasury a fine of about 362.000 dollars, to settle civil liability due to sanctions violations on Iran (826 transactions for users located in Iran between October 2015 and June 2019, due to the absence of geolocation-based IP address blocking), and to invest another 100.000 dollars in compliance, in the specific area of sanctions monitoring. A few weeks earlier, the U.S. Department of Treasury itself had also fined Bittrex Inc., another platform for cryptocurrency exchanges, 29 million dollars for “apparent violations” of sanctions on certain countries and AML regulations. More recent, besides, is the crisis at Genesis Global Capital, whose situation is critical and at risk of bankruptcy, as evidenced by the nominee of an outside consultant to assess its financial situation. Which seems a déjà vu in respect to the FTX affair, from which we started. In short, the crypto world is going through a storm. And the cause is precisely the absence of a regulatory framework.

The time for regulating the cryptocurrencies market (and the FinTech one) is over 

This regulatory explanation of the crisis facing the cryptocurrency market is not our speculation aimed at making even more evident the importance of RegTech solutions, just like our SaaS Daitomic. Indications to this effect come mainly from very authoritative sources, namely major U.S. and U.K. financial authorities. “The implosion of cryptocurrency exchange FTX shows the need to bring the crypto world within the regulatory framework”, said Bank of England Deputy Governor Jon Cunliffe, before adding that “while the crypto world, as was demonstrated during last year’s crypto winter and last week’s FTX implosion, is not at present large enough or interconnected enough with mainstream finance to threaten the stability of the financial system, its links with mainstream finance have been developing rapidly”. The message is clear: regulators need to put stricter controls in place as soon as possible and take action to “prevent a crypto shock that could have a much greater destabilizing impact”, so that “innovation can take place but within a framework in which risks are properly managed”, again quoting the words of the BoE Deputy Governor. Words echoed, from U.S. academia, by Carol Alexander (Professor of Finance at the University of Sussex and consultant in Crypto markets and financial risk analysis) in reference to Binance - another leading cryptocurrency exchange leader -: “unlike normal exchanges, self-regulated crypto exchanges aren’t required to raise the alarm when a trade has lost so much money that the collateral in the account needs topping up”. In short: absence of regulations means unreliability of the market. And, in the case of cryptocurrencies, this unreliability is now evident to anyone. Even to Katherine Dowling (Chief Compliance Officer at Bitwise Asset Management), Sarah Shtylman (Partner at Perkins Coie) and Justin Slaughter (Policy Director at Paradigm) who, in a recent panel, pointed out that the FTX crash has generated at least one positive effect, namely a stronger impetus than ever aimed at creating a specific regulatory framework for cryptocurrencies, at least in the United States. A unanimous chorus, in short, that believes it is essential and, at this point, even urgent to fill the regulatory gap affecting the cryptocurrency market, in order to prevent this sector, too, from experiencing a meltdown similar to the one caused by the 2008 financial crisis.

Crypto, FinTech, digital banking... the solution is there and it's called RegTech, or rather: Daitomic

Of course, the Crypto world is not the only one experiencing a crucial moment of transition from a regulatory vacuum to ever-increasing regulation. The same situation affects the entire FinTech sector, but also the digital banking ecosystem in general. And we at Aptus.AI, with Daitomic, are already in the race to address the need for accurate, real-time regulatory analysis that will hit all Crypto and FinTech realities shortly. Compliance will no longer be an ancillary activity - so to speak - but a compelling need. And RegTech solutions will certainly play a leading role in this process. This is also why one of our next goals is to extend our horizon from the scope of traditional banks compliance needs to the growing ecosystem represented by FinTech and Crypto. Also because the picture we recounted was eloquently and widely anticipated by the speakers during the Web Summit 2022 sessions that we followed with interest. Without repeating what has already been written within the dedicated blog post, the need for a quick and effective regulation for cryptocurrencies (and not only) can be summed up with the expression “legislation time”, used by Emma Joyce, CEO of GBBC Digital Finance. It is a complex and certainly challenging situation that will lead to ever-increasing regulation and thus an ever-growing need for digital and interactive regulatory accessibility. Exactly what Daitomic offers: want to learn more?