The recent issue involving the FTX exchange has raised fears about widespread contagion in the market. That is, the risk that other major exchanges face liquidity problems and may even fail. Recently, even the giant Coinbase has become a target of these speculations. However, Coinbase CEO Brian Armstrong assured that his exchange is not vulnerable to the kind of fallout suffered by FTX. After the collapse of FTX, Armstrong went to the twitter to explain their views to the market. According to Coinbase CEO, the “event” around FTX appears to stem from risky business practices. And according to Armstrong, Coinbase does not engage in these practices.
different business model
At first, Armstrong expressed sympathy for everyone involved in the FTX situation, especially anyone who may have lost money. That’s because as reported by CriptoFácil, FTX started a withdrawal block on Tuesday (9) that worried several users. FTX CEO Sam Bankman-Fried (SBF) stressed that funds are safe and that the withdrawal queue was returning to “more reasonable levels”. However, SBF confirmed the following day that FTX had suffered a “liquidity crisis”. Eventually, Binance announced a bailout deal with FTX that involves buying the exchange. “This event appears to be the result of risky business practices, including conflicts of interest between deeply interconnected entities and misuse of customer funds (borrowing of user assets),” Armstrong explained. On the other hand, the CEO said that Coinbase does not operate with customer funds. Unless customers request a transaction, Armstrong said the exchange does not handle the funds. The exchange has clarified this in previous statements, including following the crash of Celsius, Voyager and Three Arrows Capital (3AC). These three companies went bankrupt after Earth (LUNA) collapsed. At the time, Armstrong said that Coinbase had no exposure to these companies. Again, the CEO said that Coinbase has no exposure to FTX or its token (FTT), nor to Alameda. The price of FTT has dropped 73% in the last 24 hours, destroying the value of whoever holds the token. Finally, Armstrong indirectly criticized the issuance of tokens by exchanges, such as the FTT case. Coinbase has never issued such a token and publicly audits its finances to assure customers that their funds are safe.
The root of the problem: lack of regulation
However, Armstrong gave a controversial opinion about another of the FTX causes. According to the executive, part of the problem stems from the lack of regulatory clarity on cryptocurrencies in the United States. Without this, Armstrong estimated that 95% of cryptocurrency trading is carried out abroad. These offshore companies engage in “more opaque and risky business practices”. Armstrong argues that the US needs to have regulations that protect consumers. “We must continue to work with policymakers to create sensible regulation for exchanges and centralized custodians in each market (as we have been doing for some time). But we need to see a level playing field applied, which has not happened to this day,” he said. In the long term, Armstrong said that decentralized funding will help mitigate the risks associated with trusted third parties as all activities will be publicly auditable on the blockchain. Unfortunately, decentralized finance (DeFi) is very prone to attacks and failures. In 2022 alone, DeFi users lost $3 billion in attacks. To avoid issues similar to that of FTX, Binance CEO Changpeng Zhao said on Tuesday that his exchange will soon introduce “proof of bookings” with the aim of offering “full transparency” to clients.
