The FTX Blowup was Actually a Failure of Traditional Finance, and Another Piece of Evidence that the World Needs Cryptocurrency.
In May of 2021, cryptocurrency exchange FTX found itself in hot water after a “socialized loss event” caused its users to lose millions of dollars. This was not the first time an exchange has experienced such a blowup, and it certainly won’t be the last. However, some have used this incident as evidence that cryptocurrency is inherently flawed, and that it cannot be trusted as a financial asset. In reality, the FTX blowup is not evidence of problems with cryptocurrency, but rather, they are evidence that large crypto exchanges lack the real advantages of crypto, such as anonymity, sound money, security, and privacy. This was a classic failing of traditional finance, rather than a failing of crypto.
One of the core advantages of cryptocurrency is that it provides users with a form of sound money. Unlike fiat currency, which is subject to inflation and government manipulation, cryptocurrency is decentralized and independent. This means that its value is determined by market forces, rather than by the whims of central bankers or politicians. However, most major exchanges currently operate like traditional banks, with the exchange acting as custodian over user deposits.
“But I heard only I can have access to my crypto! It’s encrypted!” — well… sure, but if your money is in one of these big exchanges, then they are the ones holding your private keys. They aggregate funds into their “hot wallets”, and then do the same thing with those funds that traditional bankers do: lend them out, give themselves bonuses, use them as collateral… The main difference is that unlike with traditional banks, as of now most crypto depositors are not insured by the government, and often cannot recover their funds in the case of bankruptcy:
It is important to recognize that the FTX blowup is not evidence of problems with cryptocurrency, but rather, they are evidence of a classic failing of traditional finance. Cryptocurrency was created as a response to the failures of traditional finance, which has been plagued by fraud, manipulation, and counterparty risk for decades, if not longer. However, many cryptocurrency exchanges have simply replicated the same flaws and vulnerabilities of traditional finance, rather than embracing the true advantages of crypto.
So, as someone who likes the ideals of crypto, but doesn’t want to get ripped off, what is the solution? Fear not, all you need to do is make sure to control your own private keys. That means using a non-custodial wallet (you may have heard of Metamask or Trust Wallet… there are many more) — a piece of software (or hardware, or a browser extension) that interacts directly with a blockchain so that you can hold or transfer crypto without having to go through anyone else. That said, U.S. regulations dictate that most transfer points between USD and crypto require KYC, so a common path is to sign up for a major, regulated exchange, buy crypto on there, then transfer the crypto into your own non-custodial wallet until time to sell (make sure to look up local regulations and keep track of your funds for tax purposes).
In conclusion, the FTX blowup is not evidence of problems with cryptocurrency, but rather, it is evidence that large crypto exchanges lack the real advantages of crypto, such as anonymity, sound money, security, and privacy. Furthermore, these incidents are a classic failing of traditional finance, and bring into even greater focus the potential advantages of real crypto. As the cryptocurrency industry continues to mature and evolve, it is important for exchanges to prioritize the principles of crypto and embrace the true advantages of this revolutionary technology, avoiding the financial pitfalls of the past. Only then will cryptocurrency be able to fulfill its true potential as a transformative force in global finance.
