The collapse of FTX in November of 2022 came as a shock to millions of users who, after having trusted the promises made by centralized cryptocurrency exchanges, suddenly found themselves unable to access their funds.
The US House Financial Services Committee Investigates the Collapse of FTX
The full US House Services Committee (HFSC) hearing, Investigation into the FTX Collapse, Part One, was held on December 13, 2022. This hearing was unprecedented in the history of cryptocurrency and was designed not only to investigate the causes of the FTX collapse but also to determine who, if anyone, was at fault — and the list of suspects extends far beyond Sam Bankman-Fried.
The committee hearing was chaired by Representative Maxine Waters (D-CA), who is the current chair of the HFSC. She described the hearing as "the first step in our investigation into the FTX collapse and the potential risks posed by cryptocurrency exchanges."
The Causes of the Collapse
The reasons for the collapse were many, including errors by regulators and auditors, a failure by FTX to disclose its financial condition to customers, and the fact that FTX was holding customer funds in off-shore accounts and allegedly using them in speculative investments.
However, the root cause of the collapse was a lack of liquidity on the part of FTX. This lack of liquidity was exposed when CoinDesk published an article stating that a significant portion of Alameda Research’s assets consisted of FTT, a token created by FTX that enables exchange users to receive discounted trading fees.
Thus, when customers attempted to withdraw their funds from FTX after the news broke on CoinDesk, FTX was unable to reimburse them. FTX had essentially printed money from thin air in the form of FTT tokens, which it then lent to Alameda Research without having any actual assets to back its FTT tokens' value.
The Failure of Excessive Centralization
The sole witness at the hearing was John Jay Ray III, who is a bankruptcy expert and the current CEO of the FTX Group. He stated, "the FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets."
In other words, the problem was excessive centralization without oversight.
FTX was a firm that operated without federal regulatory frameworks and traded highly complex assets. It also had close ties to federal agencies that failed to pursue due diligence with audits into customer assets, which ultimately led to a deposit boom followed by a bankruptcy crisis. You don't have to squint to see unsettling parallels between the subprime mortgage industry and the 2007-2008 financial crisis.
The Need for Checks and Balances
The bitter irony of the FTX collapse is that cryptocurrency was intended to create a decentralized economic system that would help prevent another corrupted, centralized exchange from causing a financial crisis. In fact, Satoshi Nakamoto, the inventor of Bitcoin, wrote at length about the risks of centralized systems.
Representative Brad Sherman (D-CA), a member of the HFSC, said that "the complete and sudden collapse of FTX is a reminder that we must be ever vigilant in our oversight of the digital asset markets." And while government oversight and other external checks and balances are key to the success of any financial system, the people who develop the system itself also have important responsibilities.
Conclusion: Decentralization is Imperative
Unlike centralized finance, decentralized finance (DeFi), including InfinitySwap, has built-in protections in the form of automated-market-makers (AMM), trust-less trading governed completely by smart contracts, and no intermediary services or human third parties that could be susceptible to corruption or incompetence.
That's why DeFi is the future.
Here at InfinitySwap, we are absolutely dedicated to the original vision of cryptocurrency as a decentralized, inclusive, democratic financial system meant to provide economic empowerment and access to the means of wealth creation and innovation. Moreover, thanks to the Internet Computer, we can realize this vision at Web speed with direct, bridge-less integration with other blockchains.
Join us as we help revolutionize customer safety and reinvent the Internet!