Collapse of FTX Cryptocurrency Exchange

In News

• A sharp decline in the prices of Bitcoin, the collapse of the Terra Luna network and new crypto-tax regulations in India have compounded miseries for investors and the overall industry.
  • However, the sudden market meltdowns turned more intense after the shocking FTX crash.

About the news 

• FTX was one of the largest and fastest-growing crypto exchanges in the world, largely tapping into the crypto derivatives market. 
  • Before the collapse, it was the second-largest cryptocurrency exchange globally and, along with Binance, accounted for a majority of global cryptocurrency trades.
• This event dragged Bitcoin’s price to a two-year low.

What’s the platform used for?

• FTX is set up as two verticals: 
  • One can be accessed by global users, and the other is specifically built in compliance with U.S. law. 
  • FTX.US, catered to U.S. residents as they could not legally trade on the FTX International platform. 
  • FTX claimed to have over one million customers in 2021.
• FTX International offered investors an option to trade in tokenized stocks, which are digital coin-based derivatives of shares of actual companies. 
• It also allowed users to bet on expected valuations of pre-IPO companies. Such features attracted users to the platforms. 

Major challenges

• The latest crypto crash affected not just FTX users, but also traders investing in top cryptocurrencies like Bitcoin and Ether.
• Investors holding large reserves of the exchange’s own FTT token took a hard hit as it lost most of its value in just hours.
• About 130 affiliated firms are now part of the bankruptcy proceedings. 

Way Forward 

• The volatile crypto market from here could face more regulation, according to some experts.
• Crypto companies are deeply intertwined: they invest in one another, buy one another’s tokens and lend tokens and capital to one another which means the collapse of FTX could continue to topple others.
• This fallout makes a strong case for why we need decentralised systems like Defi. We will see an increase in transparency and widespread adoption of a decentralised system.
• This crash will force Web3 firms to build better solutions and develop effective rules for evaluating systematic risk.
• The incident has brought up the need for regulations in the sector: The step taken by Binance to launch an industry recovery fund to help projects during a liquidity crunch is a positive step in that direction.

Source: TH