Voice of the Industry

FTX is not a crypto failure, but a centralisation failure. Learnings from the FTX collapse

Tuesday 29 November 2022 10:52 CET | Editor: Andra Constantinovici | Voice of the industry

Douwe Lycklama, founding partner at INNOPAY, formulates a lucid analysis of the context that lead to the FTX collapse, while detailing the important lessons that the crypto and larger economic market should learn and act on in the coming future. 


The FTX collapse is the latest of the 2022 crypto failures. The biggest so far, with 1,2 million account holders turned into creditors and billions missing. Years will pass before this bankruptcy will be settled and the outlook for recovery for clients is bleak. It is unlikely that a similar scenario will happen as with MtGox, which went bust in 2014. The remaining Bitcoin there created appreciated in fiat value during the bankruptcy, such that creditors can be soon paid out handsomely in fiat, making up for the fiat value of their initial holdings. Most likely, there isn’t a nest egg left in FTX as their assets were largely self created tokens, or lost during trading operations. The first information seems unsettling.

In the case of FTX, customer deposits were used for speculation on the account of trading firm Alameda, FTX’s sister company. This is a banking practice from the 1920-ties, which was prohibited by the 1933 Glass Steagall act, which forbids banks to use customer funds for own speculation. However, this act was repealed in 1999 which is often associated with the Global Financial Crisis of 2008.

Then there was FTX leveraged trading, using self-issued tokens as weak collateral. The self issued tokens were ‘marked to market’, by trading a small amount publicly and using that price for the whole stock of tokens. This also pumped the balance sheet, easily misleading high-profile investors who were queuing up (a.k.a. as ‘FOMO-ing’) into the latest FTX investment round with USD 30 billion valuation. Hardly any due diligence took place. FTX’s spectacular growth numbers and high-profile marketing campaigns (including Super Bowl adds) mesmerised investors, regulators, and the general public.

Lack of an oversight board is another amazing fact. Even more astonishing is the absence of basic financial and operational controls, which John Ray exposed after his first days of being FTX’s bankruptcy CEO. E.g. three FTX board members have huge personal loans (approx. 1,5 billion in total) with their company. He had never seen anything like this in his 40-years career as a bankruptcy specialist, which includes the high-profile scandal, fraud, and subsequent bankruptcy of energy conglomerate Enron at the end of 2001.

Political donations seem also part of the FTX fact mix. Sam Bankman-Fried and other wealthy FTX executives donated USD 40 million to the Democrats election campaign. In the coming years more dubious facts will come out. For now, it is more than clear that FTX was a scam, with crypto as conduit.


Douwe Lycklama, founding partner at INNOPAY, formulates a lucid analysis of the context that lead to the FTX collapse, while detailing the important lessons that the crypto and larger economic market should learn and act on in the coming future.


How could this happen? The larger regulatory context

There is no definite answer for now. However, there are some explanatory facts. FTX was in the Bahamas, with a US professional subsidiary, while mass marketing its services globally, though mainly in the US. Regulators have the habit to prioritise their energy on companies located domestically, as coordinating with regulators globally can be a murky affair, certainly with new topics such as crypto. 

From the Bahamas, FTX was actively marketing their services in the US, while US citizens could officially not buy on the platform. Probably VPNs helped out here, and we’re interested to find out how many US customers there were in reality. For sure, heavy marketing gave FTX the sense of trustworthiness, towards investors, politicians, regulators, and the public. In three years’ time, FTX became the world's third largest crypto service provider, following Binance and Coinbase.

FTX did not seem to face heavy regulatory scrutiny although the Bahamas regulator pushed back on this sentiment. Too little too late. Operational oversight lacked completely. Such basics apply for every company, but certainly for financial institutions. FTX was able to offer services (eg certain derivatives), where US based crypto providers are constrained by their regulator. Not a level playing field.

Learnings and opportunities

The basic fix of prevention is not so complicated, as very basic hygiene factors of operational management were not attended to. Such a large-scale business failure is not specific for crypto and not specific for regulators. Probably FTX completely outpaced regulators’ ability and willingness of action, partly because they were lured into believing the bonafide intentions of FTX. Also, Alameda probably was falling under other jurisdictions as it is headquartered in Hong Kong, despite being financially heavily intertwined with FTX.


Douwe Lycklama, founding partner at INNOPAY, formulates a lucid analysis of the context that lead to the FTX collapse, while detailing the important lessons that the crypto and larger economic market should learn and act on in the coming future.


International coordination in traditional finance has taken shape through international bodies such as the (BIS) Financial Stability Board, OECD, and IMF. For crypto this is still in the works for a decade, via many papers and conferences. By now, the KYC/AML part is well aligned with global AML provisions. Recently both IMF and FSB published new consultation papers and it appears that convergence and clarity is near. Regulators want to put as much as possible the same rules for crypto as for fiat, which makes sense as many of the risks (operational, legal, sanctions, KYC, etc) are similar as with traditional financial services. At the same time, crypto has some other properties (e.g. transparency of blockchains, bearer instruments, smart contracts, no middlman, user control of data), which may require different or even less regulation as less human intervention is involved in DeFi versions of lending, exchange, and payments.

Centralised entities led by humans prove time and time again to be prone to FTX-alike accidents. Greed, ego, and animal spirits are often in play as well. In the past ten years, crypto developed from being purely decentralised (with that advent of Bitcoin) to various shades of centralisation where a limited group of people call the shots around the protocols, coins, and organisation. Despite the incidental implosion of centralised companies such as FTX, Celsius, and Three Arrows Capitals, the underlying decentralised services and protocols show to keep on working. The risk there is more of a technological matter than of human matter, once a smart contract is deployed in an irreversible way.

The specific properties of blockchains offer unprecedented properties for transparency for users and authorities. In real time assets and liabilities could be followed ‘on chain’, instead of making quarterly or yearly reports to regulators. A true regtech opportunity where innovators and regulators could and should work hand in hand. 

At the same time, public and authorities need to become more aware and educated upon the opportunities and caveats of the peculiarities of cryptos and decentralised infrastructures. Also the public must become more aware of dangers when dealing with centralised entities in general. These risks are not exclusive for crypto, as traditional entities have similar risks, but these are better controlled. Crypto will catch up again, but not after a prolonged period of ‘winter’, where trust in the sector must carefully be re-gained. Here, the sector itself must join forces further, to educate themselves, regulators, politicians, and the public at large.

For sure 2022 has been a another huge setback in the image and trust of crypto assets. But let’s not forget that the underlying infrastructure itself proved to function well and therefore should be regarded as a separate topic. In this area, innovation will continue to advance as stablecoins and possibly CBDC will become carriers of fiat value over new rails. End-users will not perceive much change of this background innovation. Just as telecom users did not perceive much of the VOIP revolution of the early 2000s, which ultimately brought ‘more for less’. In payments and financial services, we may find a similar development in the decade ahead. Although the innovative future is bright, we may not have seen the last bump in the road yet…

About Douwe Lycklama

Douwe Lycklama co-founded INNOPAY in 2002 Douwe Lycklama co-founded INNOPAY in 2002 and is one of the thought leaders of digital transactions, like paying, billing, identity, data sharing, and applicable regulation. His drive is to bring innovation in these areas to financial institutions, startups, businesses, and governments and help them innovate to make opportunities in digitisation a reality.




INNOPAY is an international consultancy firm specialised in digital transactions. We help companies anywhere in the world to harness the full potential of the digital transactions era. We do this by delivering strategy, product development, and implementation support in the domain of digital identity, data sharing, and payments. Our services capture the entire strategic and operational spectrum of our client’s business, the technology they deploy, and the way they respond to local and international regulations.

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Keywords: cryptocurrency, cryptocurrency exchange, regulation, blockchain, FTT, Bitcoin
Categories: DeFi & Crypto & Web3
Companies: FTX, INNOPAY
Countries: World
This article is part of category

DeFi & Crypto & Web3




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