Crypto companies urged to learn lessons from FTX collapse 'or risk Lehman-style crisis'

The lack of broad oversight and transparency remains a challenge in the cryptocurrency sector, Chainalysis CEO says

Cryptocurrencies and decentralised finance are powered by blockchain, which is generally considered to be a safer way to conduct transactions and one that could end up replacing middlemen, such as broShow more

Cryptocurrency companies should learn lessons from the collapse of the FTX platform, or the industry could risk a broader crisis similar to the one that stemmed from the fall of Lehman Brothers in 2008, the chief executive of blockchain platform Chainalysis has said.

The lack of broad oversight and transparency remains a challenge for crypto companies and regulators, who need to come together to ensure the sector becomes more trustworthy, Michael Gronager told The National.

"Maybe every five to 10 years we will have an FTX [collapse]. If this happens again, we'll have similar things, like Lehman Brothers," he said.

Similar to banks, crypto companies need "corporate maturity to store people's [assets]," he said.

"By corporate maturity, it means a proper governance structure, proper processes and procedures, and control for the funds and proper audit of everything," he said.

US-based Lehman Brothers was widely seen to have played a major role in the unfolding of the global financial crisis.

The collapse of FTX, meanwhile, sent shock waves across the cryptocurrency industry. Sam Bankman-Fried, the former chief executive of the company once valued at $32 billion, is facing criminal charges.

Transparency and regulation are needed to "protect consumers, otherwise they will go elsewhere", Mr Gronager said.

The cryptocurrency sector can look to banking – the same industry it is challenging – as an example of how to implement oversight and regulation, owing to its centuries' worth of experience in dealing with challenges.

While banks have had their fair share of failures, they offer a precedent for regulatory process, he said.

In the US, there have been 564 bank failures from 2001 to 2023, with 414 occurring between 2008 to 2011 and peaking at 157 in 2010, the latest data from the Federal Deposit Insurance Corporation shows.

The most recent were those of Silicon Valley Bank, Silvergate Capital and Signature Bank, all of which were heavily tied to the technology sector, and First Republic Bank.

The crisis this year also reached Europe, where Switzerland's Credit Suisse was acquired by rival UBS in a government-orchestrated deal.

However, the institutional and historical knowledge lenders have gained over more than five centuries of operations have helped them to build a "pretty strong regulatory framework", Mr Gronager said.

"Even though sometimes they fail, [studying banks' structure] would be a way to move forward. At the same time, it would set a high bar for crypto businesses," he said.

Cryptocurrencies and decentralised finance are powered by blockchain, which is generally considered to be a safer way to conduct transactions and one that could end up replacing middlemen, such as brokers and banks, in the financial system.

The lack of oversight and regulation in the crypto space has resulted in a number of challenges and failures in the industry.

Alex Mashinsky, former chief executive of cryptocurrency platform Celsius Network, famously said that "banks are not your friends".

Ironically, Celsius was forced to file for Chapter 11 bankruptcy in the US last year after steep losses. Mr Mashinsky was sued for fraud in New York this year.

That was part of a tumultuous 2022 for cryptocurrencies, which included the collapse of the Luna cryptocurrency along with its associated Terra stablecoin, the failure of Singapore's Zipmex and the downfall of Mr Bankman-Fried's FTX.

The number of failed crypto coins numbered "at least" 2,383 from 2013 to 2022, with 1,584 having been abandoned or having no value, according to data platform Visual Capitalist.

The industry recorded the most "deaths" in 2018, when a total of 751 coins failed for various reasons, including for just being a "joke", it showed.

Crypto companies already have certain controls in place, such as performing audits and protecting customer funds.

But Mr Gronager said there was still a long way to go before a widely accepted system was put in place, which would be built by agreeing on parameters that will enhance the reliability of cryptos.

"We want to move everyone up on the level of right controls and processes. We will get there, but we are not there yet, to be honest," he said.

Meanwhile, Chainalysis is in the process of "building out a team in the UAE", and the New York-based company has plans to open an office to tap into the potential of the Middle East, Mr Gronager said.

He did not specify a timeline.

"The UAE will be one of the hubs around the world where crypto growth will be bigger than others ... that's an opportunity for us to be a partner there. So, yes, we have a high focus on the UAE," he said.