Changpeng Zhao, FTX and ‘cryptogeddon’

Written by Dave Wallace
25th November 2022

The FTX debacle has shaken the world of crypto.

I think transparency will be the mantra for all finance companies

In years to come, it will be viewed as a moment of reckoning for the market—when the Wild West of the emergent years was replaced by control and discipline.

Much like the dotcom crash, it’ll sweep away speculation and bad ideas and usher in realism and a more business-like agenda.

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

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

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

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

“From compromised systems integrity and faulty regulatory oversight abroad 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 is a pretty big statement, considering Ray was appointed to sort out Enron after its collapse.

So, what were CZ’s views?

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

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

To address this, CZ believes three things have to happen:

Firstly, the industry has to become more transparent. Exchanges need transparency of reserves, processes and governance.
Secondly, there is a need for regulation. The sector must work closely with regulators and auditors.
Finally, the consumer needs to be more educated. Financial literacy is essential so consumers are not constantly chasing super high yields and can differentiate between good and bad behaviour.

CZ went on to say that the way crypto exchanges must work is different from that of traditional banking institutions. For example, traditional companies work on the principle of fractional lending – i.e., they don’t need to cover 100% of the assets that customers have deposited with them. They have the central banks covering effectively as the lender of last resort should things go wrong. Crypto exchanges do not have that backstop yet, so they should always be able to cover customers’ assets 100% – something that FTX failed to do. Blockchain enables certainty around this – for example, an account balance generating a hash combined with other hashes on the chain to form a root hash, which users can then verify.

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

Everything CZ had to say made an enormous amount of sense. Undoubtedly, FOMO played a big part in introducing many people to digital currencies. I would hazard 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 moment for building frameworks that work for the consumer but which also work for the industry.

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

The FTX debacle has some way to go before it plays out entirely. In the future, it will be recognised as a moment of reckoning when the industry sorted itself out and grew up. The principles for change are apparent and now is the moment to ensure it happens.

As for FTX, I am pretty sure it will be coming to you on Netflix soon. And the lead? I’ve got my money on Johah Hill!

About the author

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