On November 11, in one of the most publicized crypto meltdowns, FTX filed for bankruptcy in Delaware, leaving an estimated 1 million clients and other investors facing total losses in the billions of dollars.
FTX breaches their own terms of service
The exchange stopped accepting customer withdrawals because it did not have enough money to cover all the cryptocurrency held on its platform.
The acts of FTX seem to indicate that customer investments have been misappropriated.
According to Matthew Nyman, a specialist in digital assets and Web3 practice at the legal firm CMS: “if you were an FTX customer, you should have felt pretty safe because they were telling you that they weren’t going to do anything with your funds, but they broke their pledge by lending to Alameda, a sister company to FTX.”
In particular, according to the exchange’s terms of service, none of the cryptocurrency in users’ accounts is “the property of, or shall or may be leased to, FTX Trading,” and “None of the digital assets in your account are FTX Trading’s property, and none of them shall or may be lent to FTX Trading. FTX Trading does not portray or treat digital assets in users’ accounts as FTX Trading’s property.”
In other words, FTX was only permitted to store the funds on behalf of the customers and cannot utilize them for any other purpose.
FTX alleged breaching securities regulations
Based on the Wall Street Journal, the cryptocurrency was already the subject of an investigation by the US Justice Department and US Securities and Exchange Commission (SEC) before it crashed. The US branch of the exchange was the subject of the inquiry.
Several of the assets featured on the crypto exchange may have breached securities regulations, according to the two governmental organizations. As a result, FTX, the company in charge of the assets, would also be in violation of the rules.
How to prevent such crypto meltdowns
Increased regulation may result in greater stability in the famously unstable crypto market. Tally Greenberg, head of business development at Allnodes, a platform that offers hosting, monitoring, and staking services, asserts that: “regulations will come up and they have to come up at some point, which will stabilize the market even further.” “That safeguards investors, which is good. It’s not a problem.”
In order to assess which crypto platform to use, investors will need to consider the following legal issues:
- How will my digital investments or assets be categorized in an insolvency proceeding?
- Do any conventional safe harbours exist that would permit termination, liquidation, and set-off of claims in a US bankruptcy proceeding?
- How will my assets or claims be assessed?
- What is the proper disposition of any collateral held by a counterparty?
- What are the dangers associated with taking today’s digital assets (assuming I still have access)?
- Do I have any legal options to hold management accountable for any possible losses?
Understanding and assessing risk
The most important lesson from FTX’s collapse, however, revolves around risk understanding and how the idea of what is unsafe and what isn’t can drastically alter as the crypto landscape is changing.
Being an FTX user turned out to be a similarly dangerous investment as owning actual crypto because of two factors: the exposure FTX investors had to the FTP token and the peculiar connection between FTX and Alameda via Bankman-Fried.
Inevitably, the collapse of FTX has rocked the cryptocurrency market, which was already in shock following a spring disaster that cost the market $1 trillion. Bitcoin and Ether, the two most widely used cryptocurrencies, have experienced sharp price declines.
The FTX story is a prime example of why regulation is required to protect investors in the crypto market and that centralised crypto services and exchanges should be held to the same standards as other institutions handling client funds.
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