INTRODUCTION
With the new economy on its way to flourishing and plummeting, it can be rightly said that the cryptocurrency exchange has no cryptocurrencies for the moment to trade. It was made abundantly evident by the Terra-Luna crash in May that cryptocurrencies are fundamentally unstable and subject to systemic disasters. However, speculative finance will oppose any efforts to control “alternative assets,” or gambling chips, as long as there is immense liquidity floating around. The belief that the crypto would exist apart from the capital market and money economy, is too naïve to oversee the fluctuations the economy does to the tokens and imbecile to not grade the insulation provided to the cryptocurrency. While placing reliance on tokens and stablecoins as compared to fiat money though no intrinsic value has been attached to such a form of currency, the approval of the government in the form of legal tender was yet to be achieved by the crypto thus having no government backing and rendering the owners of such assets to be vulnerable.
A wake-up call came with the collapse of the cryptocurrency market in May 2022, when the prices of digital coins plummeted and some were almost worthless. The FTX-Binance incident once again demonstrated that cryptocurrencies are nothing more than a collection of disposable, digital “bits” generated by speculators to serve as “currency” for speculation. According to a recent European Central Bank study, up to 10% of EU households “may own crypto assets,” while according to a survey by the US Federal Reserve, 12% of US adults held cryptocurrencies in 2021. Hence, there is a moot point to be addressed whether the cryptocurrency should be addressed in the form of strict regulation by decentralization or be banned for the tender economy to be uptight.
UNDERSTANDING THE PHENOMENON OF CRYPTOCURRENCY
Cryptocurrency the much-hyped term in today’s finance known for giving returns in an unprecedented manner of investment made, is a digital payment system that operates outside the purview of control of the banks or government. Though held majorly in the form of investments and assets, cryptos are mined using encryption algorithms which are preserved in crypto wallets.
Peer-to-peer technology makes it feasible for the asset owners who possess the cryptocurrency, to trade in cryptocurrencies and send and receive payments. Payments made using cryptocurrencies do not exist as actual physical coins that can be transferred and exchanged; rather, they only exist as digital entries to an online database that details individual transactions known as a public ledger which is operated through blockchain technology.
The process of “mining,” which includes employing computer power to solve challenging mathematical problems, produces coins, which are the currency’s basic unit of exchange. Additionally, users have the option of purchasing the currencies from brokers, then storing and spending them in digital wallets. The encryption keys held by the asset owners verify the identity and connect to the cryptocurrency that is held in the crypto wallets.
A cryptocurrency exchange, or digital currency exchange as it is more often known, is a company that enables users to swap cryptocurrencies or other digital currencies for traditional fiat cash or other digitally held assets. Credit card payments, wire transfers, and other modes of payment may be accepted through exchanges in exchange for digital currencies or cryptocurrencies.
ABOUT FTX and BINANCE SAGA
FTX and Binance were the two most discussed crypto exchanges that used to hold a substantial amount of market power in the digital currency industry with the latter speculating recently in Twitter causing the former to file insolvency. Bitcoin’s fall to an estimated $17,500 set a trend among other cryptocurrencies. With a steep 11% decline in crypto market capitalization, it has dropped to $906 billion. When FTX’s liquidity problems were revealed, the market first experienced dejection. It has collapsed, leaving a black hole on its balance sheet estimated at $8 billion (£6.8 billion). A crypto news site published a report on Alameda Research’s balance sheet, a cryptocurrency hedge fund owned by FTX co-founder Sam Bankman-Fried. To obtain additional loans, Alameda used FTX’s cryptocurrency, FTT, worth billions of dollars. Their combined ownership of FTX and Binance meant that if FTT’s value declined, both businesses would suffer.
Binance announced it would “liquidate” its FTT position “due to recent events,” which worried investors. Total. As a shareholder in FTX, Binance invested in 2019. The company earned $2.1 billion in FTT tokens and Binance‘s own Stable Coin in compensation for selling its stake last year. Zhao declared that Binance will purchase FTX and save it in what appeared to be a cease-fire. In the midst of rumours that FTX had a hole in its finances, Zhao abruptly yanked the plug, sending Bankman-owned Fried’s into catastrophe. Binance stated it could no longer proceed with the deal after looking behind the hood.
As a result of its inability to pay anxious clients, FTX filed Chapter 11 bankruptcy on November 11. The business of Sam Bankman-Fried, founder of FTXcrypto, is now being investigated by regulators. Singapore’s market regulator recently announced that Binance, the world’s largest cryptocurrency exchange by volume, is under investigation. On November 8, Binance committed to purchasing FTX; however, the next day, it withdrew its offer.
In cryptocurrency, Changpeng Zhao founder of Binance is still the most powerful middleman, but he won’t rescue Sam Bankman-bankrupt Fried’s exchange. Coinbase and Binance are similar centralized exchanges, but FTX is significantly larger with a market cap of $32 billion as of earlier this year. The fact that everything goes to the organization implies a centralized authority or at least a big or small organization making choices with access to your data, money, or whatever else they need.
ANALYSIS
It is possible to prevent a repetition of the FTX failure by monitoring crypto exchange assets in real time instead of relying on annual reports with gross errors. However, this would be a herculean task for the regulator who is in charge of overseeing the regulation of cryptos. Regulatory authorities must also establish a framework for evaluating cryptocurrency risks along with on-chain data stress testing and independent audits being a part of this making it impregnable to be beleaguered. The market share of Binance in cryptocurrency trading will rise as investors leave FTX. Binance will benefit from its ability to lower transaction fees to maintain its dominance. It is important to note, however, that when the number of exchanges is restricted, there is a greater risk for customers of any one crypto provider or significant trader to fail.
Blockchain technology and cryptocurrencies offer a market value that has been repeatedly proven, and the global media often highlights these attributes. It is not unusual for these intermediaries to simply be brand-new (and often unregulated) versions of existing traditional financial intermediaries. Despite the fact that crypto assets are in some way sustainable, there are many reasons to doubt that cryptocurrencies can democratize finance. Since decentralized blockchain technology cannot handle high volumes of transactions and cannot reverse transactions, intermediaries are likely to streamline cumbersome decentralized services for users.
As a result of decentralization, one is able to use independent control and decision-making, but the overall system’s direction is not dependent on the honesty of one authority. In this situation, decentralized currencies like bitcoin seem to be the most advantageous. Dispersed systems with no central authority are less likely to be attacked by cybercriminals. Having said that, decentralization cannot ensure cyber security on its own. If the distributed ledger were to become centralized, a bank or other central authority potentially would control and regulate the process of mining subsequently. But given the high number of cryptocurrency failures, centralizing the operation of crypto exchanges would be a welcome strategy. Hence, a regulator with powers to govern the basics of mining till the trading of cryptos must be established ensuring centralization though with perils. The concept of decentralization, in the event of recent examples having a global effect on the economy along with the investors’ money in cryptocurrency, is a volition in illusion with the economy in such a vulnerable state of collapse forsseing recession.
Written by Aathira Pillai
Edited by Diksha Rajput