The sudden incident involving FTX, the third-largest cryptocurrency exchange in the world by volume, has sparked an uproar in the cryptocurrency community that, in terms of linked dynamics, has many evoking memories of the financial crisis that started in 2008: here is an explanation.
Some have gone so far as to say that FTX and Lehman Brothers are comparable in terms of their importance and the potential effects of their collapse on the financial system. What nearly went bankrupt a platform with a market cap of $32 billion?
Explanation of the FTX controversy
FTX was reportedly insolvent as of November 2 according to CoinDesk. The investigation was sparked by what appeared to be a shady partnership between Sam Bankman-trading Fried’s company Alameda Research and FTX. Alameda Research in particular appears to have significant exposure to the FTT token, a cryptocurrency released by FTX and useable within the ecosystem of the platform. The value of FTT decreased as a result of the recent constriction in the cryptocurrency market, causing Alameda Research to suffer significant losses because it was unable to fulfill its obligations to its investors.
Competition Binance, which was attempting to acquire FTX’s holdings, appeared to be able to help address the issue.
After conducting a thorough investigation of FTX’s financial records, Changpeng Zhao, CEO of Binance, formally denied proceeding with the transaction, confirming the problems earlier noted by CoinDesk.
Competition Binance, which was attempting to acquire FTX’s holdings, appeared to be able to help address the issue.
The result was a tsunami that hit investors: FTT token withdrawals were stopped, and Sequoia Capital, a venture capital firm that had invested about $213 million in FTX, officially acknowledged a 100% loss on its investment.
Significant losses were also incurred by small investors who held FTT tokens. BTC’s value abruptly dropped, which led to the collapse of the cryptocurrency market.
The involvement of regulators
In numerous countries around the world, regulators have responded to recent developments with vehement measures.
Authorities in the Bahamas, where FTX and Alameda Research are based, have placed part of FTX’s assets under freeze after hiring a liquidator to decide whether or not to file for bankruptcy.
On suspicion of illegally stealing user money and using it to support Alameda Research, FTX is the subject of an inquiry.
The operations of FTX have also been restricted in a number of other countries, including Australia and Japan.
In order to find out whether FTX has broken any financial regulations, US authorities, particularly the SEC, have also started an investigation.
What effects will this have on the crypto market going forward?
The downfall of FTX and the events that followed it represent a turning point for the whole cryptocurrency market. The incident occurs following a year of market decline, a decline in NFT trading, and crisis occurrences like the Luna token issue. Some contend that this is the beginning of the end, while others think that regulations can finally bring order to an industry that is still in its infancy.
It is clear how critical it is to develop exchange legislation that can promote technological advancement and market expansion while safeguarding consumer interests and preventing the implementation of fraudulent schemes.
It is clear how critical it is to develop exchange legislation that can promote technical advancement and market expansion while safeguarding consumer interests and preventing the implementation of fraudulent schemes.
The FTX case also serves as a reminder of how crucial it is to guarantee the stability and reliability of the entities operating in the sector and their protocols. To date, regulators’ efforts have mainly concentrated on anti-money laundering aspects, perhaps focusing too much on the risks associated with using cryptocurrencies for illegal purposes.
A big step will be made in this direction with the approval and implementation of the Markets in Crypto Asset (MiCA) regulation. According to the draughts that have been in circulation thus far, the regulation will give consumers significant transparency obligations, including responsibilities for disclosing assets set aside for reserves.
Regaining the trust of individuals who currently view the crypto market as being extremely unsafe due to the lack of any consumer protection measures will also depend on the establishment of a clear and balanced regulatory
