FTX is a new cryptocurrency exchange based in the Bahamas. The exchange was founded in 2019 and, as of July 2021, had over one million users, making it the third-largest cryptocurrency exchange by volume. Recently, it has filed for bankruptcy. The fallout is expected to be widespread.
The company’s plummet could make future investors more protective, and digital asset-regulating agencies to be stricter. This situation has never been seen before due to a number of factors, such as unregulated systems and subpar global oversight. Additionally, control rests in the hands of very few people who lack experience and may be corrupted.
But before we dive deeper into the problem and see if all this could lead to new cryptocurrency regulations, let’s go over what actually happened, which triggered this entire chain of reactions.
The context of using a new cryptocurrency
The crypto industry and its U.S. regulators have been in a bit of a stand-off for several years now. Dozens of new digital currencies and companies have cropped up, but the agencies responsible for policing these markets are having trouble keeping pace. Despite Bitcoin having been released over a decade ago, there is no central authority regulating the industry.
Digital assets are primarily coins, tokens, and currencies that use cryptography technology. Their transactions are recorded on a blockchain, which is a decentralized electronic ledger that is transparent to everyone. It’s sort of like a giant spreadsheet.
What happened to FTX?
Any new cryptocurrency trades on specialized platforms and must be registered with the S.E.C. (Securities and Exchange Commission) before they can be sold to the public, as most digital assets are offered as securities which makes them subject to U.S law accordingly. As more details become available about the inner workings of Bankman-Fried’s business, there may be increasing support for taking regulatory or legislative action. According to a court filing by Ray, “There were no appropriate ‘disbursement controls’ over FTX’s expenditures,” and employees simply submitted payment requests through an online chat platform.
FTX Group’s cash was not managed in one central location. Instead, the company used its corporate funds to buy real estate for employees and advisers in the Bahamas, where FTX Group had its headquarters. As Reuters has reported, FTX, Bankman-Fried’s parents, and company executives have bought $121 million worth of real estate, with a focus on “luxury beachfront homes.”
A series of unfortunate decisions
The company spent hundreds of millions in the Bahamas, buying homes and vacation properties for its senior staff. According to Ray, the FTX Group did not keep accurate records of its digital assets, or have proper security measures in place. Bankman-Fried communicated with employees through an auto-deleting application and told them to do the same.
The new cyptocurrency industry and U.S. regulators have been in a state of conflict for several years. With the launch of dozens of new currencies and companies, the agencies responsible for monitoring the markets are struggling to keep up. Bitcoin was released over thirteen years ago, yet there still isn’t a centralized government to regulate the industry.
Cryptocurrency is digital money that uses blockchain, a decentralized electronic ledger, to keep track of transactions. This practice is transparent to everyone because it stores information on the blockchain- almost like an endless spreadsheet.8 The most popular regulatory agency that oversees digital assets is the S.E.C.. The S.E.C regulates cryptocurrencies by classifying them as securities, which are bonds, stock options, and other properties that have monetary value and can be traded. Consequently, before being able to sell any of these digital assets to the public, they must first be registered with the Security Exchange Commission.
It will take time to understand the root cause of the FTX crisis. However, we could see two positive outcomes from this tragedy. First, it might provide a learning opportunity for similar businesses in the future. Second, it might make companies less likely to collapse in a similar way. In the future, investors may be more cautious of digital asset investments because they are often associated with aggressive marketing and false promises. Additionally, government regulation surrounding these assets might become clearer and stricter.
After a business’s failure, people can look back and see what went wrong and use that knowledge to help other companies in the same industry avoid making the same mistakes. It is always beneficial when investors can learn from past failures so they will know where to focus future efforts.
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