Zheng agreed, arguing that crypto exchanges will become more centralized over time and that increased scrutiny by investors and regulators may tilt the digital assets space towards traditional finance firms like BNY Mellon, FIdelity and Bank of America/Merrill Lynch.
In any case, regulators, especially in the U.S., are likely to act relatively quickly, especially in light of a coordinated effort by federal agencies to create a unified regulatory framework for digital assets. Islam believes the sense of urgency around regulating digital assets has been accelerated.
“It’s inevitable that there will be issues in the future, but the hope is that such swift and devastating drops in value actually become tail risk events versus what they are now in the crypto world today, which are regular occurrences,” he added.
Who Is To Blame
According to Islam, at Republic Capital it was generally known that Alameda and FTX co-mingled funds and that FTX was using customer deposits to fund Alameda.
There were other warning signs that FTX was a risky enterprise to begin with, said Gene Grant, founder and CEO of LevelField Financial
“The yellow caution lights were flashing for FTX for some time,” wrote Grant in a note yesterday. “The world loved the story of a brash young man taking on the world, building an empire, and creating a firm from nothing. The problem is that financial services companies are not the same as other companies, and the qualities that make a great leader are those that are less flashy: trustfulness, safety, and risk mitigation.”
Grant cites a pair of examples:
• Sam Bankman-Fried's origin story involves the arbitrage of bitcoin prices between Korea and Japan—a difference created by Korea’s capital controls, which lends to an appearance that the business was founded through violating or testing the limits of Korean law.
• Bankman-Fried also took to YouTube to explain that the “research” in Alameda Research was added because upon founding they could not obtain bank accounts for a crypto-trading company—suggesting that he and his partners were making false statements to banks.
“These two incidents alone are indicative of the lack of critical leadership qualities,” wrote Grant. “Should the leaders of financial services companies, the ones we trust to keep our funds safe, speak about their potentially unlawful activities? We may admire great leaders who push the envelope to make things happen, but these two activities do not seem like someone making great changes to the system, but rather someone violating well established laws for personal benefit. Maybe not the type of person we want safeguarding other people’s money.”
FTX’s collapse underscores the importance of solving the crypto custody question for investors and advisors. Crypto-curious clients are likely to turn to traditional financial institutions, including advisors, for answers about where and how they should acquire and store their cryptocurrency.
“An exchange’s security protocol, liquidity, fees, ownership, history and user experience are essential checks you should make,” wrote deVere’s Greene.