The implosion of FTX, Sam Bankman-Fried’s Bahama’s-based exchange is, by volume, one of the largest financial frauds in history. But despite it impacting more than one million people and with up to $10 billion of client money lost, so far, little has been said about the irony of this historic event.
Specifically, the fact that this failure has come from the crypto industry itself and not from the centralized banks which are often at the receiving end of the ideological ire of bitcoiners and crypto-heads.
In crypto’s defense, the problems that befell FTX weren’t down to a structural failure of the technology itself, but rather the result of outright fraud carried out by a major centralized exchange that secretly gambled with clients’ money.
The irony doesn’t end there, however. It’s highly likely that, with just a little more scrutiny and tougher enforcement, regulators could have seen this coming. These, of course, are actions that have been persistently opposed by crypto ideologues who believe that regulatory authorities, namely the Securities and Exchange Commission (SEC), are on a mission to destroy the space.
Unfortunately for them, it would appear that the SEC doesn’t need to destroy crypto because it’s doing a very good job of imploding by itself.
Do the Feds really want to destroy crypto?
Having inherited the SEC lawsuit against Ripple Labs and its founders for selling undeclared securities, SEC chairman Gary Gensler has been on the receiving end of constant criticism and accusations of being against crypto. But history presents a different record.
Indeed, in the corridors of government, there are doubtless technocrats and bureaucrats who believe that the FTX implosion was partly caused by Gensler’s soft approach to crypto. They may well be thinking that, had regulators been tougher, any fraud would have been discovered well in advance.
Some politicians had even fought openly for regulators to take it easy on the crypto industry. Among these was congressman Tom Emmer who, last March, penned a letter to the SEC asking that regulators not “overwhelm” the industry with requests for information.
Yet, there is something odd about all of this. The very origins of bitcoin were all about decentralization and transacting without a third party. Do not trust, verify was the mantra, or in the words of Satoshi himself:
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
From a bitcoiner’s perspective, the failure of FTX is a consequence of one of the many risks of centralization
Is there a lesson to be learned here? Probably, it depends on where you stand. Bitcoiners are sitting on their keys on hardware ledgers telling the rest of the crypto degenerates, “we told you so, not your keys not your coins.”
At the same time, many in crypto have seen the light and have realized that centralized finance is very dangerous when there’s no regulation. Others are buying ledgers and storing their keys privately.
A quick look at the statistical activity of the biggest decentralized exchange by market share, Uniswap, shows an uptick in activity during the initial days of the FTX implosion but activity soon died down.
Decentralized exchange protocols execute matching buy and sell orders automatically without the need for a third party and are, therefore, consistent with the original principles of bitcoin. However, for a bitcoin maximalist, decentralized exchanges may not be of much use, given that they’re mostly used to trade different crypto-pairs and there is, so far, no decentralized exchange with a fiat on-ramp.
Put simply, you can’t convert your crypto tokens to actual dollars on a decentralized exchange. Then there’s another problem with decentralized exchanges: the clunky and unsecure technology that has so far led to a total of 122 hacks with a total of $3.8 billion lost to criminals.
Centralization is likely here to stay
Also worth noting is how bitcoiners’ revolutionary semantics morphed into a more speculative discourse as big players built a casino upon it.
As the casino was built, the altcoin empire grew and sucked in many people who had previously held only bitcoin. It’s no coincidence that bitcoin dominance started breaking down in December 2020 as soon as its bull market started: when bitcoin goes up, people gamble more in altcoins and when it goes down, bitcoiners come back to pick it up.
It’s unlikely the casino is going to go away, but the FTX implosion was big enough to influence how many people think and behave. It should also strengthen the resolve of policymakers who want to regulate crypto as stringently as they regulate banks, if not more. Basically, the decentralization vs centralization debate is set to rumble on.
Both the increased mistrust of people in centralized exchanges and the increased regulatory fervor can push people further into bitcoin and decentralized finance. However, centralized exchanges aren’t going away either. At the end of the day, you can never make a real profit without exchanging your tokens for real and hard dollars.