Is FTX just another reason not to trust crypto?

When one of the largest exchanges in the cryptocurrency (crypto) industry (FTX) collapsed recently, investors in the exchange token and those who had held (or stored) their crypto on the now defunct platform lost billions of dollars in value. Is the collapse ‘just another reason not to trust crypto’, or is there something we’re missing?  

Yet again, the headlines across the media and even those coming from finance professionals themselves have declared FTX ‘another nail in the coffin’ for crypto. But there are definitely fundamental truths about the collapse that naysayers and ‘doomsday’ profits are missing. There’s far more to understand behind the collapse pinning the blame on the technology itself.

Here’s a summary, in very simple terms, of why equating FTX’s collapse with ‘just another crypto failure’ is a mistake.  

FTX’s collapse wasn’t code-related

The ‘motto’ of Bitcoin is ‘Vires in numeris’ which simply translates as ‘strength in numbers’. Put another way – it means don’t trust; verify. Not humans; but code. 

This is very important when it comes to the FTX failure. There has been a lot written about the elaborate details around the failure, but what is critical for the layman to understand is that this failure was related to human judgement and action, not code; not blockchain. What has become very clear from the failure is that crypto exchanges/intermediaries need to be regulated so that they aren’t allowed to perpetuate this kind of damaging, financially devastating behaviour.

Failure started with a decision to trust a centralised finance institution 

Coupled to this, It is also important to clarify that ‘centralised’ financial institutions (or those reliant on entities like the owners of the FTX exchange) are not representative of the technology that will underpin the next wave of innovation when it comes to the internet (called ‘Web3’). Web3 technology will hopefully see us achieve a future in which  individuals don’t need to trust institutions for the safety or access to their assets. 

As evidence of this, financial platforms like Uniswap, MakerDAO and Compound (called DeFi services or ‘decentralised finance’ services) kept working and processing every trade and withdrawal because their code makes it impossible to defraud anyone. They aren’t reliant on anything except code. 

We should assign accountability to ourselves only

The collapse of FTX highlights the need for ‘self-custody’ of our own crypto wealth.  This can be a scary concept for those who are used to trusting institutions like banks or investment funds with their money. Having your own crypto wallet which only you have control over (and the ‘digital’ keys to) or understanding and using DeFi services can appear complex and means that many people still use centralised exchanges to store their assets. This, in turn, means trusting that an institution will act in your best interest instead of having your assets 100%  in your own control at all times.

Self-custody is often free. You can set up a new wallet; and as many of them as you like; and it won’t cost you anything. Transferring funds between these carries very low cost and is usually a ‘flat fee’ depending on what network you’re using. Right now, network fees are at the lowest they’ve been in 12 months, and new innovations are constantly bringing the cost down.

The premise of moving money outside of the control of the traditional banking system is what crypto is all about, giving us the ability to transact more freely, more fairly and more globally. FTX represented moving it outside of the control of the traditional banking system; to another form of centralised control. FTX’s failure wasn’t a crypto failure, but rather, yet another indicator of the danger of trusting centralised institutions, particularly deregulated ones.