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 

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    • 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

    How different is this from the Luna, Celsius, and Voyager collapses?

    • Terra [LUNA] is a cryptocurrency project (not a platform) which collapsed in May this year.
      • Formerly one of the top cryptocurrencies by market capitalization, its LUNA cryptocurrency and Terra USD [UST] stable coin lost over 90% of their value.
    • This caused liquidity shortages that prompted lending platforms like Celsius and Voyager to suspend withdrawals, which hastened their own collapse and legal woes.
    • FTX is a crypto exchange rather than a lending platform.

    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