Recent pieces in the media across the country concerning the FTX saga are often right on the law, but wrong on what the failure of the cryptocurrency exchange means for the cryptocurrency industry.
Financial regulators in the U.S. already have the tools they need to deal with the overnight cratering of Sam Bankman-Fried’s cryptocurrency exchange FTX as well as associated hedge fund Alameda Research. What is problematic in assessing the way forward for this new industry is in differentiating between what cryptocurrency is and what businesses like FTX do.
Cryptocurrencies can be thought of as exclusive claims on assets that exist on a shared ledger maintained by a community of participants that may or may not know each other that allows for peer-to-peer value transfer.
The way these networks are designed allows for unique digital property to be exchanged in a peer-to-peer manner without the need for a central counterparty. That is the innovation that was introduced by Satoshi Nakamoto with the publishing of the Bitcoin white paper in 2008.
SBF created a company that allowed individuals to come together to buy and sell cryptocurrencies and related financial products based on cryptocurrencies. In this way, FTX was much closer to the Chicago Mercantile Exchange than anything else, and it is apropos that CME CEO Terry Duffy recently called out the way that SBF and FTX did business. The failure of FTX was a failure of centralized entities that function as middlemen to facilitate transactions for customers. It was not a failure of cryptocurrency writ large.
Where the industry goes from here in the wake of the failure of FTX is an open question, but the value proposition of peer-to-peer value transfer of digital assets without relying on a central counterparty is still extremely promising.
NELSON M. ROSARIO
Adjunct law professor, Chicago-Kent College of Law
Founder and partner, Rosario Tech Law
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