On November 2 2022, an article was published on Coindesk, outlining a concern about the liquidity of one of the biggest exchanges – FTX. Following a spat between the CEO of FTX and Binance on Twitter, the following announced he would be selling his FTT tokens on November 7th. What resulted was a ban run from FTX, which has torpedoed the company. As of the time of writing, it is insolvent and bankruptcy proceedings have begun as its creditors scramble to recover their money from the firm.
The failure of one of the biggest and leading exchanges within just a couple of days – from November 7 to 11, when the company filed for bankruptcy, has given rise to some difficult questions. Should the crypto market remain the wild west of the financial industry or bear some regulation? What part did Binance play in the collapse of one of its biggest rivals? And should the UK remain on its course towards welcoming the crypto industry as outlined by the Gov in April 2022?
In an evidence enquiry, the UK Treasury heard representatives of Binace, Galaxy digital and CryptoUK – a lobby group, to attempt to answer these urgent matters:
Crypto lobbyist demands regulation of markets similar to EU framework
One of the most interesting developments of the inquiry was the demand of the CryptoUK representative – Ian Tailor, for tighter regulation of the markets. Tailor directly invoked the EU’s MiCA directive as comparison to how the markets in Britain should be regulated.
The MiCA, or Markets in Crypto Assets directive has recently finished its drafting stage and is pending a vote in Brussels. The directive would require large crypto institutions like exchanges to be licensed and to keep a certain amount of capital within them. The regulation would impact the majority of the crypto market – not only exchanges, but also conventional, as well as algorithmic stablecoins.
Tailor argues a similar system should be in place for the British markets as well. Another measure he insists should be applied to large crypto companies is for them to be audited. Some of the largest players in the industry, however, are notoriously resistant to undergoing audits, and there is no regulatory requirement for them to do so.
One of the biggest stablecoin issuers – Tether, for instance, does not make the state of its books public. Instead, it publishes an attestation each year – a snapshot of its assets, which does not give a full picture of its liquidity. Being required to undergo stricter oversight would help prevent crashes from taking place. In fact, FTX was not the first large financial institution to turn out to be insolvent. Earlier in 2022, both Celsius and Luna turned out to be lacking the money to make their creditors whole.
The Treasury inquires of the impact of Binance within the FTX crash
One of the biggest factors behind the bank run was the aforementioned fight between the leadership of Binance and FTX. The run started when Changpeng Zhao, the CEO of the former compared the latter to now-defunct Luna. Given the size of that crash – an estimated $40 billion, of which Zhao lost $1.6, the crypto community heeded the warning and started selling their FTT tokens.
This brings up the question – did the CEO use his position as head of one of the biggest competitors to FTX to undermine it? The representative for the company told the UK Treasury that had not been the case and was eager to send over documents proving that.
Still, there are some unsettling questions that remain unanswered. Even if Binance did not seek to destroy its competition, the growing market share of the exchange in a post-FTX world is rather concerning. If we assume it was a coincidence for Zhao to attack his competitor, which turned out to be insolvent, the state of the matters is that his company seems to be the only viable exchange left. Crypto.com, another major exchange connected to FTX was exposed to contagion and the price of CRO, its token, dropped 45% following the crash. A number of smaller exchanges, also connected to the firm have either suspended withdrawals or gone belly up as well.
This could leave Binance as the only stable option left, driving clients towards it. Such a high market capitalization could mean the firm creates a monopoly for itself – something the decentralized nature of crypto seeks to discourage.
Will the UK still try to become a hub for crypto?
As far as the UK is concerned, the pledge of the Gov in April 2022 to become a hub for digital assets seems to still be on. Jeremy Hunt, the Chancellor of the Exchequer has confirmed this before SkyNews. He states the recent crashes have not changed the intentions of the British leadership. However, he notes the innovation in financial services they seek should not be done at the expense of safety.
There has been a rift between the Gov and the FCA, the regulatory body in the UK, which takes a different stance on crypto. In 2022, the provision of crypto CFDs was actually banned by it. Following the FTX crash, the regulator has published a press release stating it does not regulate the crypto markets. The only form of oversight on them is a requirement for British exchanges to get registered, as to comply with Anti Money Laundering requirements.
The FCA’s ban on crypto derivatives
As of 2020, any cryptocurrency derivatives cannot be offered to British retail clients. The market watchdog has firmly stated that they are too risky, due to a lack of understanding of them among the most vulnerable investors. The FCA also mentioned there was “no real need” for them to be offered either.
This has led to some strict consequences for any UK company. Most notably, crypto derivatives being outlawed means CFDs on them cannot be offered. This means forex brokers in UK cannot provide their clients with leveraged crypto products. The strict policy is not in accord with the desires of the UK Gov to make the country more welcoming to digital assets.
However, it has also been quite effective at preventing losses and collateral damage from the rough state the crypto market finds itself in. For instance, in Canada, a private pension fund was found to be in the red with $95 million from the FTX crash, losing money for the participants in the fund who did not have any say in the way its leadership invested it.