FTX illustrated why banks need to take over cryptocurrency

FTX — the three letters on everyone’s lips in recent days. For those active in the crypto space, it has been a shattering blow as a tumultuous year for crypto nears an end.

The repercussions are severe, with over a million people and businesses owed money following the collapse of the crypto exchange, according to bankruptcy filings. With investigations into the collapse ongoing, it will certainly push forward regulatory changes, either via lawmakers or through federal agencies.

While regulators may feel relieved that the scandal didn’t occur under their supervision, it highlights that there simply hasn’t been enough action taken yet by regulators across the globe toward crypto exchanges, many of whom would welcome clear frameworks by those in power.

Some have argued that regulators are at fault for allowing or even encouraging FTX’s behavior and by extension, the creation of many flawed cryptocurrencies. It’s fair to say that regulators are partially to blame for this tragedy and, while not acting protects them from liability, inaction on their part is equally damaging to their reputation as they are presented as irresponsible for not doing more to protect consumers.

Ripple CEO Brad Garlinghouse tweeted on Nov. 10, “Singapore has a licensing framework, token taxonomy laid out, and much more. They can appropriately regulate crypto b/c they’ve done the work to define what ‘good’ looks like, and know all tokens aren’t securities … to protect consumers, we need regulatory guidance for companies that ensures trust and transparency.”

@SenWarren, Brian is right — to protect consumers, we need regulatory guidance for companies that ensures trust and transparency. There’s a reason why most crypto trading is offshore – companies have 0 guidance on how to comply here in the US. 1/2

— Brad Garlinghouse (@bgarlinghouse) November 10, 2022

Cryptocurrencies are a unique asset class that is only continuing to gain traction. The longer the sector goes without defined regulations, the more potential for negative events and crises. Given the novelty and international nature of crypto assets, it is no surprise that regulators are facing an unprecedented challenge that is tricky to navigate.

However, the lack of action taken by regulators is a major factor that contributed to Sam Bankman-Fried’s ability to manipulate and misuse assets for his own benefit — without direct supervision, any financial service (including banks) might be tempted to use their clients to increase their profits at the risk of putting them in danger of losing all their money.

Comparing the behaviors of regulated and unregulated entities, a good example is German crypto bank Nuri, which told its 500,000 users to withdraw funds from their accounts ahead of the firm shutting down and liquidating its business. This is unlike unregulated companies such as FTX and other crypto exchanges, which have simply frozen their clients’ assets and left them unable to recover their funds.

While it would be pertinent and sensical for any business which holds assets of a third party (such as centralized exchanges and lending platforms) to fall under the same level of scrutiny and guidelines as banks do, it might be even more beneficial if traditional banks take on the role of a “trusted third party” and offer crypto services to their clients directly. Acting as a trusted intermediary, their history over the centuries grants them a level of trust and security which could help consumers onboard and use crypto services with far more ease.

While the crypto world continues to wait for the much-needed intervention of regulators, banks should take the lead and embrace the new digital asset as a way of starting to mitigate the risks and losses that affect millions of crypto users today.

Yang Lan, CFA, is the co-founder and chairman of Fiat24, the first Swiss bank built on blockchain. He holds a master’s degree in economics from the University of Munich and an MBA from IE Business School. A former UBS banker, he holds decades of experience in banking.

The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.