What do you think the collapse of one of the largest cryptocurrency exchanges reveals?
Reda Berrehili : In my opinion, it reflects the over-reliance placed by individuals on these opaque platforms which are not necessarily very rigorous in terms of risk management. In this case, the first court documents unveiled by FTX as part of its placement under Chapter 11 bankruptcy regime reveal serious shortcomings in the handling of client funds.
Given the size of the actor who just collapsed, should we now fear a vast snowball effect?
We can really fear a large contagion within the ecosystem. It can be seen that Genesis (sister of the largest bitcoin investment fund in the world Grayscale and subsidiary of the venture capital company Digital Currency Group, also owner of the specialized media CoinDesk, ed.) is in great difficulty. However, it is a major player in the industry, which has been involved in providing lending products to institutional investors among others. If Genesis puts the key under the door, the house of cards will collapse on actors offering booklets with returns. However, we will have to wait another two to three weeks before we see the extent of the impact of the FTX bankruptcy.
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What can retail investors do until the dust settles?
The solution is clearly self-custody, you have to keep your cryptocurrencies on a ledger, or rather on a “non-custodial” wallet. For our part, we withdrew our funds from all centralized players, even those we had audited, after Celsius went bankrupt in July. We advise people to do the same.
The platforms react by revealing evidence of reserves. Enough to restore investor confidence in your opinion?
This is a good initiative but it is far from enough because it only gives us 50% of the equation. It is good to have access to the resources of the platforms, but they also have to provide their own liabilities, i.e. customer deposits. Binance, for example, announced that it holds more than $70 billion in cryptocurrencies. It is colossal but if the deposits are 100 billion, these reserves are divided and it is not serious. You must be consistent and not gamble with user funds. If customers have deposited 100,000 BTC, 50,000 ETH and 100,000,000 USDC, the platform must have them in their accounts.
Faced with this observation, what can be the solution in your opinion?
Any centralized player making deposits to centralized wallets should, in my view, be subject to the same rules as a payment service provider. I think since these players are audited and vetted by regulators as rigorously as traditional players, we will avoid bankruptcies like FTX.
Politicians and regulators are reacting to this failure, particularly in the US, and some observers fear a “gang fire” from authorities who would take advantage of the panic to regulate both centralized platforms and decentralized finance (DeFi). Is it a risk?
Yes. DeFi shouldn’t be subject to the same regulation because it involves counterparty risks, driven by deviant behavior by centralized players using their clients’ funds. It is therefore a risk linked to the human factor of these companies. However, in the case of DeFi, it is algorithms and protocols that guarantee the counterparty. The regulator must therefore make allowances. It should be noted, however, that if the issue can be put on the table in the United States, the draft European regulation MiCA (for “Markets in Crypto-Asset”) does not include any provisions relating to decentralized finance, and therefore it will be necessary to wait for MiCA 2 before any adjustment.
The crisis of confidence that the sector is experiencing seems profound, but should we therefore give up on cryptocurrencies?
Absolutely no. I see the front pages of major newspapers saying it’s the end of bitcoin and cryptocurrencies when, on the contrary, we’ve never needed blockchain so much. Because in the end it is the technology that will allow to protect the users. But we will have to bite the bullet and continue to build the technological tools to guarantee this promise of transparency of decentralized finance, of which the adage “Don’t trust, verify” (or “Don’t trust, verify”) takes on all its meaning today.