In-House Crypto Tokens = Monopoly Money
SWIFT to pilot the issuance, DVP and redemption of tokenized assets
The practice of crypto firms using in-house tokens is coming under increased scrutiny, according to a recent article from the WSJ.
FTX used native crypto-tokens called FTTs as part of the exchange. FTX companies used the tokens as collateral for loans, which became a problem when the value of the tokens collapsed, according to the WSJ.
James Wester, head of cryptocurrency at Javelin Strategy & Research, elaborated on this practice in a recent report, noting that the company essentially acted as the Federal Reserve, making its own “monetary policy” and printing its own “monopoly money” currency. Also, the native tokens are not traded much. As a result, their value is not stable, so fluctuations in price can be epic.
There are many other cryptocurrency platforms that have native tokens, but some of the most famous include:
- Ethereum (ETH) – Ether is the native token of the Ethereum platform, used to pay for transactions on the network and as collateral for smart contract execution.
- Binance Coin (BNB) – BNB is the native token of the Binance platform, which is used to pay for trading fees, withdrawal fees and other services on the Binance exchange.
The argument for having native tokens is that they act as a utility token for the platform and ecosystem. They also provide a way for users to invest in the success of the platform and potentially profit from its growth. Additionally, having an embedded token can help incentivize participation in the ecosystem, as users may be more likely to hold and use the token if they have a stake in the success of the platform.
However, native control of these tokens has serious drawbacks. Because the trading platform can essentially print its own money, this can lead to corruption.
From the WSJ article:
“If someone has their own proprietary token, by definition, they have inside information about the token, and then they’re actively trading that token, which raises a lot of questions about insider trading,” said Austin Campbell, an assistant professor at Columbia Business School.
Without using an internal token, FTX likely would not have reached the size it did and the fallout may not have been as extreme.
The utopian vision of cryptocurrency revolves around the idea that finance has been crippled by regulation. But in this case, a little more regulation would have helped. While native tokens aren’t all bad, they can create incentives for bad behavior, which is why US regulators are getting involved.
