What do you think about the collapse of one of the largest cryptocurrency exchanges?
Reda Berregilly: In my opinion, this reflects people’s over-reliance on these non-transparent platforms, which are not necessarily very strict in terms of risk management. However, the first court documents released by FTX as part of a Chapter 11 bankruptcy case show serious shortcomings in the management of client funds.
Given the size of the actor who just passed out, should we now be wary of a massive snowball effect?
We can really fear a major contamination within the ecosystem. We see that Genesis (the sister company of the world’s largest bitcoin investment fund Grayscale and a subsidiary of the venture capital company Digital Currency Group, also the owner of specialized media CoinDesk, approx. ed.) is going through great difficulties. However, it is a major player in the industry and has been involved in the supply of lending products to institutional investors, among other things. If Genesis puts the key under the door, the house of cards will collapse on the actors offering throwback booklets. However, we will have to wait another two to three weeks before we can see the extent of the impact of the FTX bankruptcy.
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What can retail investors do until the dust settles?
The solution is obviously a do-it-yourself solution, you have to store your cryptocurrencies in a ledger or non-custodial wallet. For our part, we withdrew funds from all centralized players, even those we verified, after Celsius went bankrupt in July. We advise people to do the same.
Platforms are responding by disclosing evidence of reservations. In your opinion, enough to restore investor confidence?
This is a good initiative, but far from enough, because it only gives us 50% of the equation. It is good to have access to the assets of the platforms, but they must also provide their liabilities, namely customer deposits. Binance, for example, announced that it owns over $70 billion worth of cryptocurrencies. This is colossal, but if there are 100 billion deposits opposite, then these reserves are divided and this is not serious. You must be consistent and not gamble with users’ money. If clients have deposited 100,000 BTC, 50,000 ETH and 100,000,000 USDC, the platform must have them in their accounts.
Faced with this observation, what do you think the solution might be?
In my opinion, any centralized player making deposits to centralized wallets should be subject to the same rules as the payment service provider. I think that from the moment these players are scrutinized and controlled by regulators as strictly as traditional players, we will avoid bankruptcies like that of FTX.
Politicians and regulators are reacting to this bankruptcy, especially in the United States, and some observers fear “group fire” from authorities that will take advantage of the panic to regulate both centralized platforms and decentralized finance (DeFi). Is it a risk?
Yes. DeFi should not be subject to the same regulation as it involves counterparty risks caused by deviant behavior of centralized players using their clients’ funds. So this is the risk associated with the human factor of these companies. However, in the case of DeFi, it is the algorithms and protocols that guarantee the counterparty. Therefore, the regulator must make adjustments. However, it should be noted that if this issue can be brought up for discussion in the United States, the draft European regulation MiCA (for “Crypto Asset Markets”) does not provide for any provisions regarding decentralized finance, and it will therefore need to wait for MiCA 2 until possible regulation.
The crisis of confidence that the sector is experiencing seems deep, but should we therefore abandon cryptocurrencies?
Absolutely not. I see the front pages of major newspapers claiming that this is the end of bitcoin and cryptocurrencies, when, on the contrary, we have never needed blockchain so much. Because, in the end, it is the technology that will protect users. But we will have to bite the bullet and keep building the technological tools to guarantee that promise of decentralized finance transparency, of which the adage “Don’t trust, verify” (or “Don’t trust, verify”) takes on everything. its meaning today.