The Crypto Industry: Lessons Learned from FTX and the Future of Transparency
The bankruptcy filing of FTX on November 11, 2022, sent shockwaves across the crypto world, erasing billions in market liquidity and undermining confidence in centralized exchanges. This dramatic collapse marked a pivotal moment for the digital asset industry, triggering calls for enhanced transparency and regulatory responses.
Proliferation of Transparency Initiatives
Over the three years following the exchange’s downfall, transparency initiatives have proliferated throughout the crypto industry. Progress has been marked by proof-of-reserves attestations, audits, and on-chain analytics. However, many of these reforms remain works in progress, and some of FTX’s creditors are yet to be made whole.
Impact of FTX on Centralized Exchanges
Centralized exchanges bore the brunt of the post-FTX crisis of confidence. In the weeks following the bankruptcy, users withdrew over $20 billion from major trading platforms, according to CoinGecko data. In response, exchanges began publishing proof-of-reserves (PoR) attestations to demonstrate their solvency. Binance released its first report on November 10, 2022, followed by a Merkle Tree-based report a few days later, allowing users to verify its Bitcoin (BTC) holdings. Around the same time, OKX, Deribit, and Crypto.com all published proofs-of-reserve amid fears of contagion and uncertainty surrounding crypto exchanges.
Evaluating Proof-of-Reserves
While these efforts offered some visibility into reserves, most relied on point-in-time snapshots rather than continuous audits and often drew criticism from the crypto community. One X user, David Gokhshtein, pointed out at the time that publishing proof-of-reserves wasn't sufficient, noting that "when you aren’t showing the company’s liabilities, it means nothing."
Lessons Learned and Impact on DeFi
Thomas Perfumo, Kraken’s global economist, emphasized that the "hard lessons of the past were never an indictment of crypto," adding that the FTX debacle reinforced that "governance and integrity matter." Decentralized finance (DeFi) protocols also adapted following the collapse, emphasizing not only transparency but also self-custody as a crucial safeguard for crypto users. Eddie Zhang, president of dYdX Labs, noted that DeFi now operates under stronger risk frameworks, and "governance is becoming more sophisticated," with systems that "withstand market shocks."
Challenges in Creditor Compensation
Despite the industry’s transparency campaigns and modern regulations, such as the GENIUS Act in the United States and the European Union’s Markets in Crypto-Assets Regulation, some FTX creditors have yet to recover their losses. According to a November 9 update from Sunil Kavuri, an FTX creditor representative, the exchange has distributed $7.1 billion to creditors across three rounds so far. However, because repayments are being made in US dollars rather than in-kind crypto assets, creditors are missing out on the market’s rebound since 2022. Under these circumstances, real recovery rates could range from 9% to 46% when adjusted for current crypto prices.
The Future of Sam Bankman-Fried
Former FTX CEO Sam Bankman-Fried is serving a 25-year prison sentence for fraud and conspiracy but has appealed his conviction, arguing that he was denied the presumption of innocence and barred from presenting evidence that FTX was, in fact, solvent in November 2022. Current projections assign only a 4% probability that Bankman-Fried will receive a presidential pardon in 2025. Meanwhile, former Alameda Research CEO Caroline Ellison, who cooperated with prosecutors, began serving her sentence in late 2024 and is projected to be released in mid-2026.
EN
