What Does the Collapse of FTX Mean for the Future Of Crypto?
The past two weeks were “one of the darkest in the history of cryptocurrency.” The sudden collapse of Sam Bankman-Fried’s crypto empire FTX has reverberated across the entire crypto market, causing crypto investors to lose billions of dollars of their savings. The implosion also rippled into the stock market and public pensions as Ontario Teachers’ pension fund plans to write down the entirety of its $95 million investment in FTX.
The downfall of FTX is a lesson for everyone. The collapse of FTX has also renewed the call for transparency and trust in the entire crypto industry. But the question many are asking is: where does crypto go from here and can crypto exchanges regain customers’ trust?
Before we answer this question, it is important to distinguish between centralized crypto exchanges like FTX and the actual cryptocurrency. Unlike Binance and other decentralized exchanges, FTX is a centralized cryptocurrency exchange that offers derivative, and spot trading services, and is not subject to scrutiny. FTX also did not have “proof of reserves” like others. Here is what Ethereum’s Vitalik Buterin said about the event: FTX collapse validates the view that “centralized anything is by default suspect.”
In other words, the problem is not with crypto and its underlying blockchain technology. Commenting on the FTX collapse, Buterin added that blockchain base layers and decentralized finance protocols worked “flawlessly.”
“What happened at FTX was of course a huge tragedy,” Buterin told Bloomberg. “That said, many in the Ethereum community also see the situation as a validation of things they believed in all along: centralized anything is by default suspect,” he said. These beliefs also included putting one’s trust in “open and transparent code above individual humans,” he added.
Where does cryptocurrency go from here?
In the wake of the FTX scandal, other crypto exchanges have taken to social media to reassure jittery customers by sharing information about the digital asset holdings using what’s known as “proof-of-reserve.” In the crypto world, proof of reserves is transparent auditing practice for crypto exchanges that provides an unbiased report of the assets they have in reserve. With proof of reserves, crypto exchanges become more transparent about the assets on the exchanges and the kind of liquidity buffers they have.
Some crypto exchanges have already embraced the idea of proof of reserver. Last Friday, Crypto.com CEO Kris Marszalek tried to reassure customers their deposits are safe. He said that Crypto.com would share “a full audited proof of reserve.”
Meanwhile, one DeFi startup InsurAce is proposing Deposit Insurance Scheme called Crypto Deposit Insurance Scheme (CDIS) for the entire crypto industry. Similar to FDIC (Federal Deposit Insurance Corporation), CDIS will help to further restore confidence and trust and protect the most vulnerable users. FDIC is the U.S. insurance organization in the traditional financial industry to protect depositors in the event an institution fails, and each depositor is insured up to US$25K.
How Crypto Deposit Insurance Scheme (CDIS) will work
1. This CDIS will be initiated by InsurAce as an independent entity, with participation from major exchanges and custodian providers in the industry as the DI Scheme Founding Partners. They will inject initial funds into the DI Fund pool.
2. The CDIS will be set up as mutual insurance structure. KYC-ed customers of these founding partner exchanges will purchase cover from the exchange platforms or directly from CDIS application, and the premium will be flowing into the DI Fund pool. The coverage will be aiming to protect the small/medium users only, ensuring to limit such as $10K per user.
3. In the event of any institution fails, the CDIS will perform claims and pay-outs to the affected users to secure their savings from the DI Fund pool based on the actual loss, up to the insured limit.
4. The InsurAce team will function as the insurance manager of this insurance scheme and handle all operations while supervised by the members of the mutual and regulators. This will be implemented via a governance framework.
Core Features of Crypto Deposit Insurance Scheme (CDIS)
This CDIS solution will combine the best practices from FDIC, SDIC, etc., and also the Web3 technologies to cater to the needs of the crypto industry, maximizing transparency and efficiency. Meanwhile, we will also seek a regulated path for it going forward to bring it safely to global crypto users.
InsurAce will use Web3 technology (DLT, tokenization, etc.) to bring full transparency to the operations of the mutual.
2. User Protection
InsurAce will focus on protecting small and medium depositors. Each KYC-ed user will be automatically insured up to a certain limit.
3. Established (re)Insurance Best Practices
InsurAce will follow existing best practices in the (re)insurance industry to manage risks, such as mutual insurance, enterprise risk management, data management, and claims infrastructure.
4. Compliance with regulations
The InsurAce team is already in the process of seeking a regulatory framework for crypto-insurance and can bring CDIS to a regulated environment.
InsurAce Protocol is an early pioneer in Web3 risk protection since 2020, with a dedicated and professional team that works at the intersection of Web3 and risk management. The team has built up a deep understanding of Web3-native risks thus far and is committed to building for the long-term in the Web3 risk management vertical.
The InsurAce dApp is the only protocol live on Ethereum, BNB Chain, Polygon, and Avalanche, protecting $350M of digital assets for 130+ DeFi protocols on 20 public blockchains.
In May 2022, InsurAce paid $11.7 million of claims to UST De-Peg policyholders caused by the collapse of Terra – the single largest claim payout in crypto insurance history. To date, InsurAce has covered over $350m worth of assets across 140 different protocols on 20 public chains. InsurAce famously paid out nearly $12m to victims of the $UST de peg in May 2022.
Led by Oliver Xie, InsurAce is a multi-chain decentralized cover protocol that provide protection to Web3 users for their digital assets. Oliver started to work on InsurAce project in September 2020, and prior to that, he worked as the CTO in one of the three largest Singapore-based licensed derivative Exchanges and Clearing Houses.
Oliver entered the crypto space back in 2017 where he led a team to research crypto derivatives and blockchain technology, and has gravitated towards blockchain-based Open Finance for the past few years. He identified an opportunity for a unique approach to providing insurance for DeFi smart contracts and users, and InsurAce was created.
InsurAce is backed by DeFiance Capital, Parafi Capital, Hashkey group, Huobi DeFiLabs, Hashed, IOSG, LuneX, Blockarc, and Signum Capital. InsurAce offers portfolio-based insurance products with optimized pricing models to substantially lower the cost (up to 80% lower than other insurance protocols). InsurAce offers Smart Contract risk cover, IDO cover, Custodian cover, and Stablecoin De-Peg risk cover.