Post-FTX Era: Three Reforms the Cryptocurrency Industry Urgently Needs
The collapse of FTX revealed systemic flaws in the cryptocurrency industry regarding risk management, regulatory arbitrage, and centralized power concentration. Metallicus Chief Financial Officer Irina Berkon proposes three key reforms: adopting true decentralized architecture to protect user assets, curbing global regulatory arbitrage, and building a compliant future through forward-looking legislation and technical solutions.
Editor's note:Irina Berkon is the chief financial officer and a board member of Metallicus, a San Francisco-based digital asset and blockchain technology company. The views expressed in this article are solely those of the author.
This is arguably the biggest scandal in the relatively short history of cryptocurrency: cryptocurrency exchange FTX is under investigation for allegedly misusing customer assets and losing billions of dollars through high-risk trading bets. Founder Sam Bankman-Fried has been ousted, the company has declared bankruptcy, and the event and its impact on the industry are still unfolding. We must draw the right lessons from this failure and implement three reforms.
First, this disaster should at least signal the end of unregulated, poorly managed cryptocurrency platforms. FTX's failure also confirms an argument: centralized entities that accumulate immense power can concentrate risk and abuse users' trust. We need to leverage the advantages of blockchain—which is essentially a shared, immutable, and decentralized ledger system—to empower users, protect assets, and strengthen our defenses against malicious actors.
The current highly centralized market structure, dominated by a few large cryptocurrency platforms, is out of step with the evolving blockchain era. However, in the past few years, a peculiar trend has emerged in the cryptocurrency world: significant consolidation, including the rise of Binance and FTX as major exchanges for spot trading and high-leverage risk strategies. As seen in other failures like cryptocurrency lending platform Celsius, poor risk management led to a classic bank run, with customers rushing to withdraw funds. In other cases, hackers were able to exploit vulnerable cross-chain bridges—mechanisms for transferring tokens between blockchains—to steal assets.
The decentralized path
Cryptocurrency needs a decentralized approach that empowers individual users while enhancing overall system resilience. This is not a pipe dream: we have the technology to design a better, more resilient, and decentralized system, and it is exciting to witness the rise of true decentralization firsthand. In fact, despite the impact of the earlier Terra Luna collapse, programmable "stablecoins" can still help individuals and businesses manage cash and access opportunities in the blockchain economy. As I wrote in a commentary for Payments Dive in July,stablecoins are essential for enabling digital asset transactions and peer-to-peer decentralized finance (DeFi) with full transparency and instant settlement。
True DeFi means customers always have control over their assets. But they should be able to participate in DeFi products and services to earn cryptocurrency yields without worrying about centralized platforms freezing or misappropriating their funds during a crisis. Decentralized exchanges (DEXs) eliminate intermediary risk: funds always remain in customers' wallets, while buyers and sellers are connected through regulated peer-to-peer markets.
Similarly, decentralized identity solutions can empower consumers and regulators with a simple checkmark, verifying your identity without exposing your private data to the world. We can also combat cybercrime and prevent theft by replacing vulnerable cross-chain bridges with unbreakable on-chain communication.
Addressing arbitrage and technological solutions
The second industry change is addressing global regulatory arbitrage. Blockchain enables borderless activities, which is an incredible benefit for people and businesses around the world. But in recent years, the industry has also witnessed the practice of using regulatory arbitrage as a business model. Companies like Binance and FTX continually relocated their headquarters to jurisdictions that might overlook them or allow lax compliance, trading, and risk controls.
FTX's failure highlights the need to curb regulatory arbitrage. As a new era of regulated cryptocurrency approaches, we need to lay the proper foundation through technology and infrastructure to enable cryptocurrency and fintech companies, as well as financial institutions interested in this space, to achieve compliance.
This brings me to the third point: we need forward-looking rules and legislation, but we can also advance policy goals by integrating technological solutions into the design of a compliant and secure future for digital assets. Strong regulation, preventive security measures, verified identity, and a simple customer experience are all crucial for integrating and expanding digital assets and cryptocurrency into everyday financial services and economic activities.
Ultimately, the world of regulated financial services and the world of digital assets, DeFi, and blockchain-enabled markets are becoming increasingly intertwined. The most compliant and best-operated cryptocurrency companies will evolve into partners for banks and financial institutions, and may even apply to become licensed financial institutions themselves.
A new mindset
This evolution will require a new compliance mindset that prioritizes better security, protections, and benefits than the existing financial system.
Guided by this North Star, our company has built its technology stack, regulatory infrastructure, and customer experience from the ground up. We have built on-chain identity solutions to facilitate "know your customer" (KYC) compliance and have a deeply qualified regulatory team to comply with the enforcement requirements of the U.S. Treasury's Office of Foreign Assets Control (OFAC). We continuously analyze vulnerabilities in the cryptocurrency market to learn lessons and take action, such as embedding more decentralized and modular technologies into our technology stack, and rigorously reviewing fund management to ensure a risk-averse approach.
Earlier this year, we also established an advisory board with members including former senior officials from the U.S. Federal Reserve and the Office of the Comptroller of the Currency, as well as executives with regulatory compliance and internal audit experience at major financial institutions, to draw on their expertise.
As a chief financial officer with a decade of accounting experience at public companies, I place great importance on risk management systems and culture. The industry's goal should be to lead the necessary changes and become a trusted partner to policymakers and regulators. The status quo is unacceptable; taking the right steps now will enable us to meet this moment and usher in a compliant, secure cryptocurrency future.