2022 was a big challenge for cryptocurrency exchanges. As Warren Buffett said, it’s only when the tide goes out that you find out who’s swimming naked. In a volatile market, FTX, an exchange worth billions of dollars, was instantly wiped out of the market, not to mention smaller exchanges. Many investors were not even able to retrieve their assets stored on the exchanges. Additionally, the crypto community has been discussing how to make centralized exchanges more regulated and transparent.
Following the FTX collapse, more traditional financial regulators put cryptocurrencies on their radar. The Fed Vice Chairman, SEC Chairman, US Treasury Secretary, Bank of England Lieutenant Governor, and International Monetary Fund have proposed imposing effective regulatory oversight on crypto; the market should abide by the same rules as the traditional financial industry to mitigate risks.
Of the existing cryptocurrency exchanges, Coinbase is the biggest advocate of strong regulatory oversight. Coinbase CEO Brian Armstrong stated that the crypto regulations discussed by legislators around the world will help them beat their competitors. Additionally, the exchange also published the article Regulating Crypto: How We Move Forward as an Industry from Here in December 2022, which outlines how the industry can be regulated in terms of stablecoins, trading platforms, and deposits.
Regulatory intervention in crypto is clearly inevitable after the FTX crash. That being said, in 2022, the Tornado Cash privacy protocol suffered an OFAC sanction and led to resistance to regulations in the crypto community. After all, sanctions are not what we want to see in a market seeking decentralization. Furthermore, before its fall, FTX also embraced the regulations, but it turned out that it was just a stance that allowed it to seek publicity and crush the competition.
Based on the attitudes of major exchanges, we can say that cryptocurrency regulations will become stricter in certain countries, but many are not convinced of their validity. In conventional finance, it is common for large corporations to go bankrupt, and strict regulations will not eliminate all risk. Meanwhile, what happened with Tornado Cash is always a reminder that regulations come with penalties. Once regulators start to intervene with strict measures, many innovative decentralized applications will be drowned in their cradle, and some investors may not have access to the market due to regulatory oversight.
After the crisis of confidence due to the FTX crash, exchanges have published their proof of reserves based on the Merkle tree and addresses. For example, leading trading platforms like Binance, OKX, Crypto.com, Huobi, and CoinEx revealed their reserve tests shortly after the FTX crash.
Based on the wallet addresses and user assets they disclosed, these exchanges have managed to achieve 100% coverage of user assets, with some exchanges having reserve funds that vastly exceed user assets. For example, Binance and CoinEx’s USDC reserve fees are both over 400%.
Many people argue that having a 100% reserve fee is great because it ensures that users can always withdraw their cryptocurrency. Although that statement is not 100% accurate, given current market conditions, proof-of-reserve is the best way to make cryptocurrency exchanges more transparent. Furthermore, the reserve assets of an exchange are also indicative of the performance of a platform.
For example, we all know that stablecoins have to process massive withdrawal requests when there is a leak, which means that the ratio of stablecoins to a platform’s reserve assets could tell us roughly the risk resilience of different platforms in different scenarios. extremes. As can be seen in the table below, on Binance and CoinEx, the ratio of stablecoins to reserve assets is greater than 50%, which means that stablecoin withdrawals can always be processed.
It should be noted, however, that 52% of Binance’s stablecoin reserves are BUSD, a coin issued by the exchange itself. Although BUSD has obtained the relevant approvals for its issuance, some remain concerned that it can be decommissioned if Binance crashes. Therefore, investors should assess the risks on their own before choosing an exchange.
According to the attitude expressed by cryptocurrency exchanges, most of the platforms prefer to gain user trust through high transparency. Although some cryptocurrency players argue that reserve assets are not conclusive proof of a platform’s security, compared to rigorous regulation, reserve proofs are obviously more popular among users. In addition, over time, standby testing technologies will also advance in response to market demands.
After the collapse of FTX, the cryptocurrency industry shifted its focus to security and transparency, which will bring new development trends. Also, centralized exchanges will become more transparent by facilitating transactions, and decentralized asset management on centralized platforms could even gain momentum. Therefore, investors still need to look for platforms powered by long-standing technology.
A good example is CoinEx, mentioned above. With a proven reserve rate of 100% and sufficient reserve assets, CoinEx offers strong guarantees both in terms of assets and technology.
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