Crypto exchange FTX’s downfall was in many ways obvious

As precisely summarised by the ‘Monetary Instances’, “Expertise that not many perceive may also enable for obfuscation, for fashion over substance, and for a concern of lacking out to grip even seasoned traders (together with Rupert Murdoch and Larry Ellison). Mixed with an period of low rates of interest and simple cash — now properly and really over — it’s the splendid habitat for swindlers.”

This month, I distinction the institution and improvement of the Dubai Gold & Commodities Trade (DGCX) with FTX’s meteoric rise and fall and focus on the way forward for monetary exchanges and the way investor confidence in crypto might be restored.

Established in November 2005, DGCX launched beneath the Dubai Multi Commodities Centre (DMCC) because the MENA area’s first digital, regulated derivatives alternate. Establishing a brand new pricing benchmark for gold within the UAE – specifically via the one kilobar gold futures contract – the alternate adopted up with the world’s first offshore Indian Rupee Futures contract, a product that has grown from strength-to-strength to turn out to be its high performer by way of quantity.

In contrast to FTX’s merchandise, DGCX geared toward assembly investor demand via sensible, confirmed merchandise that had been related to the area’s market and development – a formulation which grew to become the idea for its future merchandise such because the MENA area’s first Copper Futures contract in 2012, and the area’s first WTI and Brent Oil Futures contracts thereafter.

Moreover, DGCX’s strategic location and buying and selling hours of 07:00am – 11:55pm (GMT+4) present a significant place within the international derivatives panorama, connecting Asia and Europe with US buying and selling hours.

Working in tandem with the UAE’s nationwide agenda, DGCX additionally innovated new merchandise primarily based on the socio-economic circumstances of the market, maybe most notably via the launch of its Israeli Shekel Futures on June 17, 2022. Not solely a high performing rising markets foreign money for the reason that affect of the pandemic, the product additionally supported the improved cooperation and enterprise between Israel and the UAE, solid via the signing of the Abraham Accords in 2020.

Additional merchandise to launch prior to now six months embody new bodily gold futures and spot gold contracts, which is able to present merchants and monetary establishments the choice to make use of bodily gold as collateral to entry inexpensive sources of short-term lending, whereas its partnerships with Sam Valuable Metals and FinMet will once more present bourse members with entry to an ever rising vary of high-quality merchandise.

Conversely, FTX’s enterprise and product improvement remained closely weighted within the unregulated waters of crypto, NFTs, and allegedly unregistered securities; leading to a extremely unstable portfolio, the place even the bookkeeping was managed by small-business accounting instrument QuickBooks, regardless of its one-time $32 billion valuation.

And this all earlier than SBF’s alleged use of buyer cash to make philanthropic donations, property investments and prop up FTX’s companion corporations, Alameda Analysis’s buying and selling exercise.

Whereas technically right, to name FTX an alternate is known as a misnomer. In contrast to bourses corresponding to DGCX, NYSE or NASDAQ, cryptocurrency exchanges, notably these in offshore jurisdictions should not required to stick to the identical ranges of regulation as their long-standing counterparts.

As acknowledged by Joe Rennison within the New York Instances, “The implosion of FTX reveals simply how completely different crypto exchanges are from their extra well-known, and extremely regulated, counterparts. They don’t need to disclose how buyer cash is dealt with, both to traders or to a regulatory physique. Inside monetary controls might be scant.

“The absence of oversight contributed to what prosecutors stated was a years-long, widespread fraud at FTX, as soon as the crypto world’s second largest alternate. In contrast, LedgerX, a crypto derivatives alternate owned by FTX, was primarily based in the USA, and was extra strictly regulated. It’s nonetheless standing.”

Commenting on how buyer funds are afforded higher protections on a regulated alternate, Michael Blaugrund, COO of the NYSE summarised, “Investor protections, such because the segregation of roles between buying and selling venues, market makers and asset custodians, are a trademark of regulated exchanges just like the NYSE.”

Regulated by the Securities and Commodities Authority (UAE) of the UAE, a member of the Worldwide Group of Securities Commissions (IOSCO), DGCX is just not solely a extremely regulated alternate, however additional enhanced by its wholly owned clearing home, the Dubai Commodities Clearing Company (DCCC), which not too long ago obtained its renewed recognition as a Third Nation CCP (TC-CCP) by the European Securities and Markets Authority (ESMA).

Not solely a mirrored image of DCCC’s dedication to worldwide regulatory requirements, and alignment with stringent danger administration and governance frameworks, the power additionally permits all European banks to clear trades settled via DCCC with out incurring extra capital necessities as imposed by EU rules.

Whereas many have seen the collapse of FTX as a big setback to the crypto and blockchain motion, I imagine it ought to function a reminder that regulation and oversight are crucial constants in any monetary ecosystem. The reality is that FTX was only a centralised, unregulated entity that traded primarily in cryptocurrencies beneath a extremely inexperienced, poorly administered administration.

Whether or not their motives had been naïvely rooted in efficient altruism, of which an estimated $40 million was pumped into ‘marketing campaign committees and different teams, principally aligned with Democrats’, or as a part of a rigorously calculated fraud, the failure of the system ought to solely encourage exchanges to rigorously consider their choices to maneuver in the direction of regulated, decentralised fashions.

In the identical manner that centralised energy has already proven its indicators of misuse and abuse, notably via the censorship leveraged by the large tech giants in both influencing the circulate of data or closing the accounts of people that don’t share their social or political narratives, the identical has additionally been exhibited in a monetary context.

When governments are unable to adequately regulate or defend their nationwide currencies from failure, typically to the detriment of their inhabitants, as seen in nations starting from Argentina to Zimbabwe, via to gross overreaches of energy, corresponding to Justin Trudeau’s authorities freezing ‘accounts linked to folks whom police say have been concerned in unlawful protests’, the danger posed by centralised management is in the end systemic and can’t be ignored.

Whereas rigorously regulated, centralised exchanges have proven to be efficient beneath the precise governance, the one true path to impartial, monetary freedom is to make sure a community-led strategy that hedges towards the danger of malevolent management and or authoritarianism.

Dennis Jarvis, CEO at Bitcoin.com commented, “I don’t assume it’s productive for me to make predictions concerning the regulatory strategy the US will in the end take – whether or not it will likely be heavy-handed, or passive, or what it will likely be. However what I do assume occurs is that centralized crypto exchanges like FTX, BlockFi, and Celsius shall be regulated in a different way from decentralized networks like Bitcoin or decentralized purposes like Uniswap or Aave.

“Loads of regulation is about forcing disclosures and getting transparency for traders — and that’s an excellent factor. The transparency that’s baked into decentralized protocols makes them inherently much less in want of regulation. On high of that, I believe authorities companies will ultimately understand that it’s not really potential to control decentralized protocols in the identical manner as centralized entities.

“If this summer season’s LUNA coin/Celsius contagion didn’t already persuade traders, then the FTX implosion ought to make it clear to everybody in crypto now that centralized entities should be regulated. Every thing that’s occurring outdoors of crypto makes me sure concerning the long-term prospects for Bitcoin, DeFi, and crypto property that embody crypto’s worth propositions.”

Actually, the thought of utilising blockchain expertise to facilitate trust-less supply versus cost settlement with none middleman isn’t a brand new one. Acknowledged as a extra environment friendly approach to handle settlements by lowering the related transaction prices and concerned dangers, it wasn’t till August 2022 that the primary clearinghouse for the US inventory market switched on a settlement system constructed on blockchain.

Generally known as ‘Mission Ion’, the Depository Belief & Clearing Corp stated that its ‘platform is now processing round 100,000 bilateral fairness transactions a day in parallel with its current settlement methods, which stay the authoritative document. At peak stage, the platform can attain about 10 per cent of the bilateral fairness volumes dealt with by the agency’s basic settlement methods’.

Whereas no formal timeline has been acknowledged, it’s anticipated that the Mission Ion platform will ultimately substitute the present system, nevertheless, the choice will rely upon its efficiency, shopper suggestions and regulatory approval.

The place DGCX is anxious, it’s going to proceed to rigorously analysis and consider new merchandise and partnerships that add worth to its members and the markets whereas remaining as danger averse as potential. In partnering with Nasdaq Expertise AB, it’s going to quickly profit from a full suite of built-in market options, together with multi-asset buying and selling and real-time clearing functionality, pre-trade danger administration, in addition to market intelligence, market surveillance and high quality assurance purposes required to safeguard the integrity of the market.

Whereas nonetheless pending regulatory approval, the deliberate migration shall be to Nasdaq’s NFF system and happen in Q2-2023.

Past this, the alternate achieved 16 per cent y-o-y development in 2022, with 8.2 million heaps traded amounting to $162 billion in notational greenback worth.

Finally, it’s vital to do not forget that the position of an alternate is to facilitate commerce safely and securely and whereas the temptation to maneuver shortly in step with the tempo of expertise to make a fast buck will solely seemingly improve.

All of the extra purpose for exchanges and regulators to double down on evaluating and understanding new merchandise and methods till such a time once we are higher in a position to regulate our exchanges as a decentralized neighborhood.