Lessons from FTX Collapse: Crypto Regulation and Maturity

Photo by Karolina Grabowska

This morning, I made this comment in one of my Threads:

I feel that this guy distorts the narrative at first but ended up with an accurate analysis later.

The context of my statement is based on this article by Pat White, “Let’s move on from FTX’s collapse and get back to the basics.”

Rereading the article, I observe that my earlier comment was inaccurate too. Not only that the writer got it wrong in the beginning, but I think he also got it wrong in the last part particularly when he mentioned JP Morgan.

Here is the statement that I think is misleading:

The end of FTX may mark the end of Americans using unregulated exchanges, and it certainly is the end of exchange-native tokens, but crypto itself hasn’t changed one bit.

The keyword is “unregulated.” Why stop the blame on unregulated exchanges? Why not extend it to the unregulated blockchain, crypto projects, and tokens?

If “unregulated” is the problem, then “regulation” is the solution. The guy is a pro-regulation voice joining the choir of big names out there that will benefit from such policies. It is understandable because part of his job is related to tax services.

Why do I feel that a narrative like this is not something new? It appears like a re-appearance of a narrative popularized after the 2008 housing crisis.

In the aftermath of the housing bubble, the constant message that people had been hearing from politicians, economists, and mainstream media is that “unregulated markets,” “deregulation,” “greed,” and “excessive risk-taking” are the primary culprits that caused the crisis in the first place. To address that problem, more regulation was the solution.

And so, it appears that a similar narrative is being thrown out there that caused the FTX disaster.

The problem with the above narrative is the failure to consider that perhaps regulations particularly excessive ones are the problems themselves.

We see a similar argument in the Eurodollar market which is why experts in international banking considered it unpopular. In fact, in the first place, the Eurodollar market came into existence as a response to national regulations. Authorities in international banking already accepted that the rapid growth of the Eurodollar market is closely connected to relative freedom from regulation. Regulation, therefore, is more part of the problem than the solution.

Here is another paragraph that needs clarification:

In reality, the FTX collapse is a symptom of a deeper problem, which is the traditional finance "profit at any cost" mentality. For all the lip service paid to FTX as a regulated entity, at the end of it all, the exchange fell to profit-driven fraud like so many of its traditional counterparts.

The guy failed to distinguish between legitimate profit and fraudulent profit. With the dominance of an anti-profit mindset in our time, the statements above can easily be misinterpreted concluding that all kinds of profits are evil. Such a mindset is popular among “progressives” that hate all capitalists and businessmen as if they are all the same. They failed to distinguish between those who do business on a fair playing field and those who are politically well-connected.

So far, those are the two things that I think the writer got wrong at the beginning.

From here on, I agree with everything he wrote except the JP Morgan thing.

I like his emphasis on focusing on the fundamentals. That’s what we are doing here on Hive. And so, if crypto enthusiasts will start paying attention to ideas like this, I think Hive will get the attention it deserves.

For him, cryptocurrency is all “about financial self-sovereignty and cutting out the middlemen.” I agree 100% with such an idea.

He adds:

Crypto is about programmability and exploring what thousands of smart developers do when you give them an honest-to-truth API for money.

The promise of crypto isn’t just profit — it’s a system where access to financial services isn’t determined by geography, race, gender, or creed.

Commendable ideas. Happy to read confirmations like these. These are the things that keep me motivated in my crypto journey.

White is calling for maturity in all aspects of the crypto industry. He is optimistic that “there’s a trillion-dollar industry waiting to be created, rewiring the world’s financial system.”

So far, so good.

And then in the latter part of his article, he got it wrong again. He mentioned “JPMorgan’s recent entry into DeFi” and if I am not mistaken, he intends to use such a big name providing not only the model of such maturity but also an example of a “regulated” and “compliant” financial entity that all crypto entities must follow.

He lost me there.

Maybe something is wrong with me? Am I the only one thinking that the entry of big names from traditional finance in the crypto space and the recent crashes in crypto institutions are somehow connected? Why do I see entities who want to hijack the blockchain and crypto space?

Yes, we want to see mass adoption, but not through VCs and giant names. My reading of economic history somehow informs me that when big names enter the world of finance, they usually employ the service of their “big brothers” to eliminate competition to gain control. And legislation is a very effective tool to achieve that.

I wish I am mistaken and I am just a wrongheaded conspiracy thinker.

Grace and peace!