Changpeng Zhao, FTX and ‘cryptogeddon’

The FTX debacle has rocked the crypto world.

I believe transparency will be the mantra for all financial companies

In years to come, it will be seen as a moment of reckoning for the market – as the Wild West of the emerging years was replaced by control and discipline.

Like the dotcom crash, it will sweep away speculation and bad ideas and usher in realism and a more businesslike agenda.

Some believe the moment is fatal. But I don’t think so.

I recently attended the ADGM organized Abu Dhabi Finance Week. The conference had a fintech, crypto and sustainability day. Crypto Day was full to bursting; people’s appetites seem undiminished. One of the guests at the conference was Changpeng Zhao (CZ), CEO of Binance. What he said is worth listening to because it sheds light on what comes next.

CZ is a bit like Marmite – some love him and some hate him. Regardless of anyone’s feelings, there is no doubt that he is the current crypto king. But before I share CZ’s thoughts, here’s some background on the FTX “bonfire of the vanity”.

FTX, formerly one of the world’s largest crypto exchanges, collapsed and filed for bankruptcy earlier this month. New CEO John Ray III has called the collapse “unprecedented,” saying in a bankruptcy filing: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as occurred here.

“From compromised system integrity and faulty regulatory oversight overseas to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, the situation is unprecedented.”

That’s a pretty big statement, considering Ray was appointed to sort out Enron after its collapse.

So, what were CZ’s views?

He says the industry “will face many more challenges with regulators scrutinizing the sector”.

“In what is supposed to be a trustless industry where technology is removing the reliance on trust, there is a job to be done to rebuild trust!”

To solve this, CZ believes three things must happen:

• Firstly, the industry must become more transparent. Exchanges need transparency about reserves, processes and governance.
• Secondly, there is a need for regulation. The sector must work closely with regulators and auditors.
• Finally, the consumer must become more educated. Financial literacy is essential, so that consumers are not constantly chasing super high returns and can distinguish between good and bad behavior.

CZ went on to say that the way crypto exchanges must operate is different from traditional banking institutions. For example, traditional companies work according to the principle of fractional loans – ie they do not need to cover 100% of the assets that customers have deposited with them. They have the central banks as effective lenders of last resort if things go wrong. Crypto exchanges don’t have that backstop yet, so they should always be able to cover their clients’ assets 100% – something FTX couldn’t do. Blockchain enables security around this – for example, an account balance that generates a hash combined with other hash codes in the chain to form a root hash, which users can then verify.

CZ believes the industry needs an association that brings together exchanges, wallets and the blockchain developer community.

Everything CZ had to say made tremendous sense. Undoubtedly, FOMO played a big role in introducing many people to digital currencies. I would have a guess that most had very little understanding of what they were getting involved in. Education is therefore necessary.

I also think regulators have had the opportunity to sit back and see what plays out. Now is the time to build frameworks that work for the consumer, but also work for the industry.

I think transparency will be the mantra for all financial companies, not just the crypto firms. Increasingly, all companies will have to demonstrate what is happening “under the hood”.

The FTX debacle has a long way to go before it fully plays out. In the future, it will be recognized as a moment of reckoning when the industry settled down and grew up. The principles for change are clear, and now is the time to ensure it happens.

As for FTX, I’m pretty sure it’ll be coming to you on Netflix soon. And the wire? I have my money on Johah Hill!

About the author

Dave Wallace is a user experience and marketing expert who has spent the last 25 years helping financial services companies design, launch and develop digital customer experiences.

He is a passionate customer advocate and champion and a successful entrepreneur.

Follow him on Twitter at @davejvwallace and connect with him on LinkedIn.