How the FTX Crash Will Kickstart the Canonicalization Process
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Thunderstorm process
Combining media information to trace back the cause of the FTX crash:
Alameda, a related party of FTX and also under the actual control of SBF, participated in the rescue of 3AC in the form of unsecured loans in the second quarter of this year, and 3AC became insolvent after that.
The overall decline in the encryption market has led to continued expansion of Alameda's investment losses.
Alameda attracts mortgage loans to supplement funds through the platform currency FTT issued by FTX.
FTX transferred a large amount of assets to Alameda through internal transactions.
Coindesk broke the news that Alameda's balance sheet has great hidden dangers, which has begun to attract public market attention.
CZ expressed concern about the risks of FTX, and the price of FTT plummeted.
The margin gap for Alameda to use FTT as a mortgage has accelerated, and the market is increasingly concerned about the risks associated with FTX.
FTX customers concentrated on withdrawing a large amount of coins from FTX, resulting in a run.
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who bears the loss
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source of risk
The source of the risk that led to these has been revealed, that is, the centralized exchange misappropriated the token assets recharged by customers.
Under the double impact of market downturn and negative news, it is common for the industry to make announcements on centralized exchanges such as "delay and suspension of withdrawal". However, FTX bluntly admitted that there was a gap in cash flow, which completely exposed the "unspoken industry rule" of centralized exchanges misappropriating customer assets under the spotlight. Just ask, if the exchange has never misappropriated customer assets, how can there be a cash flow gap for redemption?
From difficulties in withdrawing cash to crashes and running away, centralized exchanges often leave customers with nowhere to sue. The core issue of misappropriation of client assets also has its causes:
Excessive internal authority: Since the establishment of the industry, the centralized exchange has been a comprehensive institution integrating various financial functions. While providing the main business of on-site transaction matching, it also has full custody of the token assets recharged by customers.
Asset custody is opaque: Centralized collection management is a consistent mode for centralized exchanges to store customer token assets. After customers transfer and recharge through the chain, the assets are transferred from the exchange to a small number of internal wallet addresses for unified management. Customers cannot Further track and query your own token assets.
Profit magnification impulse: Profit demands and internal KPI pressure lead to enough impulse within the exchange to use customer assets to reinvest in order to obtain more returns, which essentially magnifies the investment leverage of self-operated investment, and customers bear higher losses without knowing it. risk.
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no accident accident
Arthur Hayes, the founder of BitMEX, described the flash crash of FTX as a "big speechless event", but in my opinion, it is unnecessary. The misappropriation of client assets by centralized exchanges has long been a common phenomenon in the industry, and thunderstorms are no accident.
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02 Enlightenment from the financial industry
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References from the securities industry
The securities trading market has already entered a mature stage in major countries around the world, and each on-site securities transaction is completed under a set of standardized models with various financial institutions performing their duties:
The legal currency deposit is kept by the commercial bank
Securities kept by registration and clearing institutions or securities companies
Orders are placed by securities brokers
On-site order matching of transaction information completed by the stock exchange
Based on such a mature business-separated financial model, the securities trading market can operate fully and stably. However, even such a solution, which is taken for granted by everyone, was not established overnight.
In the 1920s and 1930s, financial institutions in the United States experienced serious mixed business risks, and then they ushered in strict separate supervision for half a century. From 1992 to 2002, China ushered in the great development of the initial stage of the securities industry, but a large number of problems accumulated in this decade, such as lack of asset isolation and customer asset protection, opaque information, and insufficient regulatory standardization, were finally passed in 2004. It was not until the bankruptcy and liquidation of leading securities companies such as Huaxia Securities and Southern Securities that the standardized reform of the tripartite depository system that has been used to this day was ushered in.
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The pace of regulation is getting faster and faster
One of the general consensuses in the encryption industry is that the bear market in which risks are cleared will be a good opportunity for the industry to iterate to a more secure and standardized market environment, and thereafter will be accompanied by more robust and reasonable solutions and a complete regulatory system.
In recent years, the compliance process of the encryption industry has been accelerating, and the heavy responsibility of undertaking encryption regulatory functions has mostly fallen on the financial regulatory authorities of various countries. According to the thinking of such regulatory agencies, the first task after intervention must be to strengthen the protection of investors.
When traditional financial institutions engage in different types of financial activities, they need to establish a sound governance structure and information disclosure system. Because when running different businesses, the behavior that is most in line with the financial institution's own interests may not maximize the interests of customers, and may even damage the interests of customers. The business scope of encrypted exchanges even far exceeds that of traditional financial institutions. Therefore, in order to reduce conflicts of interest, the regulatory authorities are likely to require that the encrypted asset trading environment be realized under the condition of isolation of multiple parties, and put forward requirements for separate operations in terms of law and function.
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The main battlefield of encrypted asset trading
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Heteronomy > Self-discipline
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transparency and independence
In order to prove its innocence, Binance announced the preparation of the merkle tree asset certificate, and then many exchanges followed up. Such developments will undoubtedly help restore confidence in the industry. However, in the author's opinion, it is still far from enough to solve its internal risk problems just as a helpless move adopted by centralized exchanges due to insufficient innate mechanisms. There are many loopholes in the merkle tree asset verification that is expected to be dominated by centralized exchanges. The current state of exchanges scrambling to publish reserves has also been dubbed a “false security phenomenon” by some commentators
The first lies in the independence of positions. At present, some exchanges are suspected of being caught by the media because of the two "counter-knocking" to create reserve asset certificates. This still does not get rid of the risk of exchanges talking about themselves or even financial fraud. The essence of decentralization or separate operations lies in multi-party constraints, and relying on a third party is often more impartial than a single institution. It is hard to imagine that an exchange or an investment-based institution can resist the temptation of profits from the main business and maintain the independence of fair custody.
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challenges
On the basis of maintaining transparency and independence, it is not easy to achieve efficient on-site encrypted transactions and securely isolate assets. Therefore, there is almost no organic combination of third-party custody and exchanges in the current market. On the contrary, some custody institutions are further turning to investment-oriented businesses such as wealth management. The lack of solutions also restricts the implementation of this tripartite model.
Summarize
Summarize
The collapse of FTX exposed the disadvantages of centralized exchanges more directly than any previous crisis in the encryption industry. The high degree of opacity and wanton misappropriation of client assets has caused uneasiness in the entire market and even the attention of the regulatory authorities. The history of the financial securities market shows that separate operations and asset isolation are necessary and effective. As the industry develops, third-party depository institutions are expected to play a key role. There is still a long way to go for this newly born emerging market to be truly just and orderly. Although short-term risk exposure can cause embarrassment inside and outside the industry, in the long run, the construction phase after the risks are cleared is often more valuable. It is precisely because there are still a lot of deficiencies that it will bring a broader space for development. The builders still need to muster up the courage to move forward firmly.
