The apex of digital currency exchange FTX’s liquidity crisis came on November 11, when the company declared bankruptcy and its CEO, Sam Bankman-Fried (SBF), resigned. South Korea is the latest country to take steps in safeguarding its financial system following the FTX collapse, with the Financial Services Commission (FSC) investigating exchanges listing their native tokens.
Another One Bites the Dust
Alameda was reported to be the largest FTT holder and would purchase and sell FTX tokens (FTT) on FTX in a price-setting dynamic. When FTX underwent a bank run, the token dissolved, and SBF’s house of cards crumbled, wiping out billions of dollars.
“We think they’re billionaires, but they’re paper billionaires. We don’t know that they ever actually have those billions of dollars in the first place. They were largely printing tokens out of thin air. The collapse at FTX came from the collapse of the FTT token. So, this was money that they printed out of nowhere, and then it wasn’t worth anything. That really shouldn’t shock anybody,” CoinGeek Chief Bitcoin Historian Kurt Wuckert Jr. said in explaining the FTX collapse on Fox News.
This has not been a surprise since even BlockQuake Co-Founder and CEO Antonio Brasse noted that many exchanges lack accountability and transparency. Because they wanted to stay one step ahead of regulators and raise capital illegally, this puts their users at risk should the exchange go out of business.
Being a digital assets exchange, BlockQuake is currently securing a BitLicense to put regulation compliance at the center of its operations. Brasse says that if all exchanges had to undergo such a process for every token they listed, these fallouts would not have happened. Fortunately, the South Korea government got off on the right foot.
Under the authority of the Act on Reporting and Using Specified Financial Transaction Information, it barred exchanges from self-listing their tokens, as well as trading or selling coins listed by anybody affiliated with the exchange in any manner.
Based on local reports, the FSC has launched the first round of its investigations into local exchanges via the Korea Financial Intelligence Unit (KoFIU). Data shows the country having over 297,000 FTX users in October just before the exchange’s implosion, making South Korea one of the primary victims in the fallout.
However, these incidents will come to an end as South Korea’s regulations are catching up with the sector, starting with proposing a new bill about halting exchange withdrawals.
South Korea Takes the Side of Exchange Users
The FTX collapse after SBF played fast and loose with customer funds triggered a wave of withdrawals that the Digital Currency Group-owned firm cannot meet, prompting South Korean regulators to push for a new bill that will sanction exchanges that abruptly halt withdrawals, requiring them to compensate their users.
Even the South Korean Financial Services Commission (FSC) supports the proposed regulation, which intends to protect traders from what has become a troubling trend in the digital asset world—unexpected withdrawal halts. A number of factors, including payment partner issues and system failures, contribute to these gaps. Yet, most cases could be attributed to exchanges misusing and abusing users’ assets.
Several exchanges have suspended withdrawals this year to deal with the fallout from a crypto contagion that kicked off in May involving the UST and LUNA tokens. In the months that followed, some enterprises affiliated with the project went bankrupt, and multiple exchanges halted withdrawals or suspended their operations entirely.
On top of it, the measure intends to secure user assets by obliging exchanges to segregate users’ assets from their funds, which have been a factor driving the current contagion. SBF was accused of shifting billions of dollars in user assets from one of his enterprises to another with ease from having a thin layer of protection between corporate and user assets.
For years, Bitcoin whitepaper author Dr. Craig Wright emphasized that only regulated, legally compliant digital asset and blockchain enterprises would weather the impending regulatory onslaught. Regulators do not need to go after digital currency companies directly; they could just slightly pressure other regulated financial institutions and banks, and the rest will take care of itself.
What this holds for the sector’s future is speculative, but some reasonable estimates include dwindling confidence. Large institutional players will see how simple it is to lose money in the business and direct their capital elsewhere. While consumers will question the Bitcoin narrative, painting it to be criminal in the eyes of everyone outside this space.
However, the Bitcoin vision Dr. Wright has always lobbied for is not what BTC and most popular cryptocurrencies have followed. Instead of focusing on digital asset trading—although it is still an important aspect of it, just not the end-all and be-all—what Bitcoin should be about is a scalable blockchain that enables true peer-to-peer communication.
And this will become the foundation for emerging technologies such as the metaverse, smart cities and artificial intelligence (AI) to fully be developed and launched. As Dr. Wright said, Bitcoin is meant for everyone to use, not just the privileged few who can afford to buy and sell it.
The fall of FTX has prompted regulatory boards across the world to enforce stricter regulations on digital currency exchanges and other blockchain-based platforms. This weeding out of the bad apples within the digital asset space may finally pave the way for people to pay attention to what Dr. Wright is saying.
