New York, U.S. | Xinhua | The recent bankruptcy of heavyweight cryptocurrency derivatives exchange FTX slammed confidence in the nascent industry, with pressure mounting for more regulation in the crypto space, according to industry insiders.
The fall of FTX means a setback for the industry for at least one cycle, which usually lasts four years, said Wilfred Daye, chief executive officer of Securitize Capital, a San Francisco-based alternative investment manager of digital asset funds.
“This is a quite significant event. I don’t think people recognize how deep it goes to the whole industry,” Daye said in an interview with Xinhua on the sidelines of The Chinese Finance Association 28th Annual Conference.
FTX’s announcement for Chapter 11 bankruptcy in a U.S. court on Nov. 11 sent shockwaves across the crypto space and financial markets and triggered governmental probes and reports of losses by several institutional investment houses.
Following the FTX fiasco, demands for more regulation are growing within the crypto community and broader society, said Gengsheng Lu, executive director with Morgan Stanley Private Wealth Management.
A centralized crypto exchange must be well regulated and given the current trade-off between fees and counterparty risks in the choice of exchanges, said Roland Li, co-founder and head of equity investments with hedge fund management firm Bizantine Capital.
He said that proof of reserves is needed for the industry by an independent audit conducted by a third party, which seeks to ensure that a custodian holds the assets it claims on behalf of clients. The idea has the support of some crypto exchanges already.
Li said the big lesson from all of this is that the major exchanges need reserve requirements, which the industry or government could enforce.
The most efficient way is to enforce proof of reserves which could happen much faster, said Andrew Bakst, co-founder and managing partner with Bizantine Capital.
According to Li and Baks, the government could be the key to protecting retail investors.
Headquartered in the Bahamas, FTX once had a valuation of 32 billion U.S. dollars and suffered a liquidity squeeze a few days ago after it was revealed that the exchange had a shortfall of around 8 billion U.S. dollars resulting from the misuse of client funds and losses in its trading arm Alameda Research Limited.