Alameda Research, FTX, Voyager Digital and more….the names of these institutions stoke fear, uncertainty and doubt (FUD) in the hearts of those willing to take the risk to engage with the cryptospace.
That said, these bankruptcies and corporate failures have allowed for regulations and clarity in the industry.
The big question for industry players is how best they can be prevented and actions that need to be taken to prevent another crypto collapse.
Our panel of experts provide angles, and insights into the way forward.
Here’s what they had to say.
Contents
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Pannathorn Lorattawut, CEO at VUCA Digital, Chief Business Development Officer at T&B Media Global
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Donald Patterson, Professor of Computer Science at Westmont and UC Irvine and CTO at Blockpliance
Sean K. August, CEO at August Wealth Management Group
“The collapse of cryptocurrency firms can be prevented by taking several measures, including:
1. Proper Regulatory Framework: The cryptocurrency industry needs a proper regulatory framework to prevent fraudulent activities and ensure transparency in transactions. Governments around the world need to create clear guidelines and regulations to regulate cryptocurrency firms and protect investors.
2. Adequate Security Measures: One of the primary concerns of cryptocurrency investors is the security of their digital assets. Cryptocurrency firms should implement adequate security measures such as two-factor authentication, encryption, and other cybersecurity measures to safeguard their investors’ digital assets.
3. Due Diligence: Investors should conduct due diligence on the cryptocurrency firms they want to invest in. They should research the reputation of the company, the management team, and the technology behind the cryptocurrency.
4. Transparency: Cryptocurrency firms should be transparent about their operations, financials, and business models. They should provide regular updates to their investors about the state of the company and any developments that may affect their investments.
5. Risk Management: Cryptocurrency firms should have robust risk management systems in place to monitor and manage risks such as market volatility, cyber attacks, and regulatory changes.
6. Education and Awareness: Cryptocurrency firms should educate their investors about the risks and rewards of investing in cryptocurrencies. They should provide educational materials, tutorials, and other resources to help investors make informed decisions.
By taking these measures, cryptocurrency firms can minimize the risks of collapse and build trust with their investors, leading to a more stable and sustainable cryptocurrency industry.”
Daniele Servadei, CEO and Co-Founder at Sellix
“One of the most important things that crypto companies can do to prevent a collapse is building a strong foundation by investing in their infrastructure, operations and security measures. Relying on a single revenue stream can be very risky, so in addition, crypto companies should also focus on diversifying their revenue. Building a strong relationship with customers can come in handy during hard times. This can be done through maintaining transparency in their operations, finances and decision-making processes which does not only boost the relationship between crypto companies and their customers but investors too. Companies should also make sure they stay clear of customer funds.
Regulations are constantly evolving so staying up-to-date with the latest regulations and compliance requirements could also help crypto companies avoid legal issues and penalties. Finally, crypto companies must stay up to date with the latest technological advancements as the world of cryptocurrencies and blockchain is constantly evolving. Making sure crypto companies stay competitive and provide innovative solutions to their customers will help them stay at the top of their game.”
Richard Gardner, CEO at Modulus
“The recent collapse of FTX, combined with the negative press on Binance, should give the entire industry pause. Exchanges have been accused of facilitating money laundering and engaging in high-risk trading that could cause the entire market to collapse. Enhanced regulation is the only way to prevent the financial collapse of cryptocurrency firms. Without oversight, these companies are free to engage in risky behaviors that could have catastrophic consequences for our economy.The recent scandals involving FTX and Binance are just the tip of the iceberg. We need to establish clear guidelines and oversight mechanisms to ensure the safety and stability of the cryptocurrency market. This includes measures to prevent money laundering and cyber attacks, as well as guidelines on high-risk trading practices. This would include a prohibition on the comingling of exchange and investor assets. The time for Congress to act is now.”
Lyle Solomon, Principal attorney at Oak View Law Group
1) Strategizing Reduction of Risk-Taking
One of the more basic ways a cryptocurrency firm can prevent collapse is by reducing risk. For the right or wrong, the field of cryptocurrency has a general perception of being a high-risk asset class. While that may not always be the case for all crypto assets/firms, the idea of elevated risk is always in the minds of investors and founders in this field alike.Taking higher risks is what usually leads to failure in all fields. As a relevant example, the FTX collapse was due to a high-risk gamble taken by the founder with an utterly wrong/misguided mindset. Such courses of action can be easily stopped by bringing in regulations and limiting the risk being taken in a cryptocurrency firm as a whole. Therefore, merely regulating activities and bringing in measures of control to activities that involve risk can save a cryptocurrency firm.One such example of measure and control of financial risk is by bringing about limitations. Under banking law, borrowing above a specific limit from a bank to a single borrower is prohibited. Crypto firms could implement similar measures against large investors and the number of tokens a single investor may buy or borrow as collateral. Cryptocurrency firms can also establish special committees to analyze risks, figure out ways to manage financial risks, and avoid any ill-advised risk-taking.2) Managing Executive CompensationThe compensation received by the executives and upper management of a cryptocurrency firm usually propels the amount of risk that is taken. As a (general) rule, executives are given inflated compensation; however, the question that comes here is how much an executive is incentivized to manage risks after such compensation. The answer is usually not so much, as most of the failed crypto companies usually have executives who were compensated significantly. Further, executives are incentivized to earn more if the crypto firm takes higher risks and reports higher profits. Thus, executives are principally motivated to take risks to achieve their profit goals as soon as possible, leading to excessive risk. Therefore, an ideal way to save crypto firms would be to create rules to control executive compensation, thus aiding in reducing risk-taking.3) Liability for Risk TakingOne common legal technique that may be used to discourage the creation of excessive risks in crypto firms is the imposition of financial culpability for the damages of any harm resulting from risks taken. This idea is central to tort law. As important as it is to compensate victims of crypto firms that go down due to unreasonable risk-taking, a motivation for enforcing damages is to avoid future harm and executive risk.
In any case, the effect of financial liability is like the inverse of compensation and incentives that indirectly promote revenue growth for crypto executives. Assigning adequate compensation payouts to victims of crypto firms for losses due to risky financial acts is ideal for preventing risky behavior from executives in the cryptocurrency field. The liability for compensation and procedural rules for assigning culpability to a crypto executive must include standard criteria such as the size of liability, the likelihood of its enforcement, and determine the extent to which the threat exists. These standard criteria, in turn, are dependent on substantive criteria for imposing culpability and procedural regulations that may aid or impede the prosecution of an executive who is liable. Hence, procedural rules that prohibit risk-taking and impose legal obligations are more likely to succeed and may raise deterrence and, in turn, save crypto companies.”
Josip Rupena, CEO at Milo
“During times of market volatility, we’ve seen ecosystem failures of stablecoins, crypto-focused hedge funds, and crypto exchanges, which has resulted in serious concerns about market integrity and consumer fund protection. In addition, with growing ties with core financial systems, the concern about systemic risk and financial stability for consumers is a main discussion.
Many of these concerns and issues can be tackled by improving exchange supervision and overall regulation. With that said, developing global standards that can be implemented consistently by national regulatory authorities will further support mass adoption and participation in crypto more years to come.Below are a few points how crypto collapses can be prevented:Crypto asset service providers should be licensed, registered, and authorized. That includes those providing storage, transfer, exchange, settlement, and custody services, with rules like those governing providers of services in the traditional financial sector. It’s crucial that customer assets are segregated from the firm’s own assets. Licensing and authorization criteria should be well defined, and responsible authorities clearly designated.
Stablecoin issuers should be subject to strict prudential requirements. Some of these instruments are starting to find acceptance beyond crypto users, and are being used as a store of value. If not properly regulated, stablecoins could undermine monetary and financial stability. There should be clear requirements on regulated financial institutions, concerning their exposure to, and engagement with, crypto. If they provide custody services, requirements should be clarified to address the risks arising from those functions.”
About Milo: Milo is a financial technology company reimagining the way global and crypto consumers access financial solutions to ‘Unlock what’s possible. By building a proprietary technology stack from the ground up and bringing on a world class team, the company has enabled millions of dollars in U.S. home loans. Milo is passionate about driving digital transformation of financial services, solving real problems, and making a meaningful impact in people’s lives. For more information visit www.Milo.io
David Kemmerer, Co-Founder, CEO at CoinLedger
“One of the best steps to prevent the collapse of cryptocurrency firms is to have stricter internal controls. Business models of crypto business pose a major challenge for auditing and internal controls, largely linked to the nature of crypto assets and business. Crypto firms should adopt sufficient internal controls to allow auditors to certain the degree of risks in the preparation and reporting of financial information. The controls will govern the expenditures, investments, and approval of credit, which are major concerns in the operations of crypto companies.
Another step is to adopt enhanced transparency as the opaque nature of crypto operations and shady activities pose a huge threat to many exchanges. The transparency of crypto companies is important for users as they decide, which website to use. Considering the decentralized nature of blockchain and cryptocurrencies, all transactions can be examined by anyone. However, cryptocurrency firms operate under minimal transparency. As governments push for more regulation in the sector, crypto companies should integrate transparency measures into their operations.
Lastly, crypto companies should track their finances. Most crypto startups and companies do not track their finances. FTX collapse revealed the problem of sloppy accounting and massive management failures in cryptocurrency firms. Having insights into the balance sheet, operational processes, and digital assets is important to track the financial position of the companies. These three steps are important in guiding cryptocurrency firms to avoid potential collapse.”
David Waugh, Managing Editor, The Daily Economy, American Institute for Economic Research
“Over the past few years, we’ve witnessed many cryptocurrency firms collapse for the same reasons as traditional financial firms: poor risk management, fraudulent practices, and lack of product market fit.
If cryptocurrency firms want to survive, one step is implementing better internal risk management tools and enacting safeguards to protect themselves from bad actors inside and outside the cryptocurrency space.Since its inception, crypto has been pushed outside traditional financial markets by a lack of clarity from financial regulators, making the ecosystem highly interconnected and exposing firms to higher risk from contagion. We saw this play out during this past “crypto winter” as the collapse of Terra/Luna and Three Arrows Capital spread to the other prominent players that loaned them funds. And then, later, the contagion from FTX had similar ripple effects.
What makes crypto unique is that the industry has been able to bounce back from these setbacks absent government bailouts, unlike traditional finance. In 1998, for example, when Long-Term Capital Management, a hedge fund with Nobel-prize-winning principals, failed, the New York Fed stepped in and organized banks to help bail out the fund. If crypto can survive and thrive into the future without bailouts, it raises the standard for traditional finance to do the same.”
Nick Ranga Senior Cryptocurrency and Forex Analyst at AskTraders.com
“The collapse of FTX sent shockwaves through the crypto markets. It also highlighted some key issues that need to be urgently addressed. FTX’s problems essentially boiled down to a mismatch between assets and liabilities – going forward, crypto exchanges need to make sure they have enough liquid assets to cover their liabilities.
Proof of reserves reports are a step in the right direction, but there are still issues with this – namely that these reports don’t disclose the full extent of a company’s liabilities. This could lead to scenarios where an exchange uses its proof of reserves to appear trustworthy while not disclosing the true extent of its liabilities.The good news is that the technology to address these problems already exists. Blockchain based solutions could ensure that an exchange has sufficient liquid assets to cover all liabilities and maintain privacy. Zero-Knowledge Proofs are a way of definitively proving a statement is true without disclosing the related information. This technology could solve this problem while maintaining privacy.
With regulators taking aim at cryptocurrencies, there is pressure on the crypto industry to get this right. It would be preferable for these issues to be addressed from within, rather than waiting for regulations that could prove costly and damaging to future development.”
Pannathorn Lorattawut, CEO at VUCA Digital, Chief Business Development Officer at T&B Media Global
“Risk management is key to running a crypto business, as we’ve recently seen from the fallout of some companies. How the firm manages its finances, operations, and investing impacts its solvency. Credibility and trust are particularly important in this industry as well, since it is so nascent and is meant to function outside the bounds of conventional regulation and oversight. Most companies will inevitably be impacted by a crypto winter, but the ones that keep value creation in mind as their ultimate goal – and keep their risk-taking in check – will be better prepared to adjust and have a better chance of surviving.”
Jim Myers, Co-Founder & CTO at Flipside Crypto
“In crypto, everything comes back to transparency and decentralization. After the FTX/Alameda collapse, which is recognized as a root cause of the subsequent collapse of multiple other firms, crypto communities centered on the lack of transparency of the centralized exchange FTX and the firm Alameda as key factors. That isn’t to say that firms must be decentralized, or even completely transparent, but it was a reminder to everyone in crypto about a core truth of all industries – if it isn’t completely transparent, you can’t completely trust it.
Open access to data is the foundation of true transparency. Truth isn’t what you say, it’s what you do, and a feature of blockchain is that what you do is presented safely and publicly on-chain, accessible to all. Analyzing this data enables us to see which ecosystems are healthy and which ones are unhealthy (and should therefore be fixed or avoided, to prevent collapse). ‘Do your own research’ (DYOR) is an empowering concept of personal agency in this process – the fact that because of crypto, anyone should be able to assess the health and reliability of leaders in the space.
At Flipside, we curate chain data into human-readable formats and make it as easy as possible to explore and present. We work to protect the right to DYOR, and ultimately the right to protect yourself or raise alarm when needed. In less dire contexts, more common contexts, it also equips retail and casual participants to be more informed and effective at achieving their own goals.”
Donald Patterson, Professor of Computer Science at Westmont and UC Irvine and CTO at Blockpliance
“It may not be the right goal to prevent the collapse of cryptocurrency firms, given that they are typically for-profit entities that must sustain themselves in a market-driven economy. Rather, the focus should be on mitigating the risks associated with cryptocurrency investments, particularly in cases where investors could suffer significant financial losses. Especially unsophisticated investors
To address these risks, lessons can be drawn from the banking industry, which has established regulations that limit the risk that firms can take with invested money. Such regulations, however, often require limiting the degree of risk that firms can take on, which may be viewed as counter to the goals of some cryptocurrency enthusiasts.
The cryptocurrency industry operates in a relatively new and rapidly evolving environment. It’s still unclear what the most appropriate regulatory framework would be to minimize investor risk while also facilitating innovation and growth in this sector. Policymakers and industry participants have their work cut out for them to identify the most effective measures to safeguard investors without stifling innovation in the industry.”
Anndy Lian, Inter-Governmental Blockchain Advisor
“The collapse of cryptocurrency firms can be prevented through a combination of regulatory oversight, risk management practices, and technology solutions. Regulators can set and enforce standards for cybersecurity, risk management, and customer protection, while cryptocurrency firms can diversify holdings, maintain sufficient capital reserves, and implement secure wallets and exchanges. Transparency and education can also play a role in promoting stability and safety in the cryptocurrency ecosystem. It will require a collaborative effort from regulators, industry participants, and customers to prevent the collapse of cryptocurrency firms.”
Justin Giudici, Co-Founder at Telos
“The collapse of cryptocurrency firms can be prevented through various measures, including increased regulation, improved security measures, and better risk management practices. Regulators can play a role in ensuring that cryptocurrency firms operate in a transparent and ethical manner, and that they have appropriate safeguards in place to protect investors. Additionally, cryptocurrency firms can improve their security measures by implementing multi-factor authentication, cold storage, and other measures to prevent hacking and theft. Finally, cryptocurrency firms can better manage risk by diversifying their portfolios, maintaining sufficient reserves, and adhering to best practices for financial management.”
