Cryptocurrency Exchanges, FTX Collapse, Regulation and Bank Runs: A Summary

A cryptocurrency exchange is a financial platform that enables people to buy, sell, and trade cryptocurrencies.

These exchanges function similarly to traditional stock exchanges, but instead of trading stocks, users can buy and sell digital currencies like Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC).

Cryptocurrency exchanges typically work by matching buyers and sellers and facilitating the exchange of cryptocurrencies.

For example, when users want to buy or sell a cryptocurrency, they place an order on the exchange, which matches other orders on the platform. 

Once a match is found, the exchange completes the transaction and facilitates the cryptocurrency transfer between the two parties.

People use cryptocurrency exchanges for a variety of reasons. Some people use them to buy and hold cryptocurrencies as an investment, while others use them to buy and sell cryptocurrencies as a form of trading. 

Some people also use crypto exchanges to convert their cryptocurrencies into fiat currencies, like US dollars or Euros, which they can use to make purchases or withdraw as cash.

In addition to enabling the exchange of cryptocurrencies, many cryptocurrency exchanges also offer additional services. 

Services can include: 

• Managing multiple cryptocurrency wallets
• Tracking prices and market trends
• Accessing a range of trading tools (i.e., Bollinger bands, etc.)

FTX Collapse Explained

On November 11, 2022, cryptocurrency exchange FTX filed for Chapter 11 bankruptcy, quickly falling out of favor. Sam Bankman-Fried, the company's founder and former CEO, saw his net worth of $16 billion collapse from $32 billion to nearly nothing in a matter of days.

Bankman-Fried said that he had around $100,000 in the bank during an interview with New York Times columnist Andrew Ross Sorkin on November 30 at the DealBook Summit.

The crypto market, which was already very volatile, was further shaken by FTX's downfall, with billions of dollars lost and the market plunging below $1 trillion.

The impact of FTX's sudden decline and collapse may be felt for some time by other cryptocurrencies and may even be sufficient to push down bigger markets.

On November 16, a class action lawsuit was filed in federal court in Florida, alleging that Sam Bankman-Fried contrived a fraudulent cryptocurrency scheme to take advantage of unsuspecting investors around the country. Steph Curry, Shaquille O'Neal, Shohei Ohtani, Naomi Osaka, Larry David, and Kevin O'Leary are also named in the lawsuit because they allegedly worked on the scam with Bankman-Fried.

Former federal prosecutor and partner at Cohen & Gresser Mark S. Cohen are on the legal team of convicted sex trafficker Ghislaine Maxwell, whom Bankman-Fried hired on December 6. In addition, Caroline Ellison, a former Alameda Research CEO and current FTX client has hired the Washington law firm Wilmer Cutler Pickering Hale and Dorr.

How DFG was able to withstand the collapse of FTX due to having no exposure to the platform

The FTX bankruptcy saw $8 billion in market losses, 1,000,000 creditors, and 134 associated firms that collapsed. In addition, it saw decades of projects and institutions that were negatively impacted, which were devastating. 

As a result of the recent shocking failure of FTX, one of the biggest cryptocurrency exchanges in the world, the highly speculative digital asset market has seen unprecedented volatility.

However, DFG is thriving despite this disastrous collapse because, as DFG founder and CEO James Wo explained, we have no exposure to FTT or SOL and instead depend on our entire investing strategy.

DFG invests for the long term and maintains a long-term investment strategy despite market fluctuations. Also, DFG has very careful risk management. Stablecoins, Bitcoin, and Ethereum are just some of the high-liquidity assets that make up DFG's portfolios' combined total.

Furthermore, DFG is aware of the dangers of leverage and hazardous bets and, as a result, has avoided both. James Wo - Co-Founder, Chairman & CIO, said, "Nobody can buy your company if you don't use leverage. Thus DFG has zero leverage, and Jsquare has zero leverage."

DFG investigates each potential project thoroughly and independently. DFG rates projects based on the experience of the founders, the uniqueness of the technology, and the track record of the team in delivering the promised product.

How Crypto Exchanges Make Money

Cryptocurrency exchanges typically make money by charging fees for their various services. Fees can be charged on a per-transaction basis or as a percentage of the total amount of the trade.

For example, an exchange might charge a flat fee of $1 per transaction or a 0.25% fee on the total value of a trade.

In addition to transaction fees, some cryptocurrency exchanges make money by charging users for access to additional services, such as advanced trading tools, research and analysis, or premium support.

In addition, some exchanges may also earn revenue from the interest earned on user funds that are held in accounts on the platform.

Another way that some cryptocurrency exchanges make money is by offering margin trading. Margin trading allows users to borrow money from the exchange to trade cryptocurrencies. 

In these cases, the exchange may charge interest on the loan, as well as additional fees for the service.

The exact ways that cryptocurrency exchanges make money can vary, but they typically involve charging fees for the services they provide to users.

Lack of Regulation

The government does not regulate crypto exchanges in many cases (apart from the USA, where they are regulated by the Bank Secrecy Act/BSA) because cryptocurrencies are still a relatively new and largely unregulated asset class. 

Moreover, in most countries, there are no specific laws or regulations covering cryptocurrency exchanges' operations, so these platforms are free to operate without direct government oversight.

There are a few reasons governments need to regulate cryptocurrency exchanges faster.

One reason is that cryptocurrencies still need to be widely accepted as a legitimate form of money, so there may be little political pressure to regulate them. 

Additionally, many governments are still trying to understand the technology behind cryptocurrencies and figure out the best way to regulate them without stifling innovation.

Another reason why cryptocurrency exchanges are not regulated is that many of these platforms operate on a global scale, making it difficult for any government to regulate them. 

In addition, because cryptocurrencies can be bought, sold, and traded on the internet, it is easy for users to access exchanges in other countries, making it challenging for governments to enforce their regulations.

The lack of regulation of crypto exchanges largely results from the fact that cryptocurrencies are a new and rapidly evolving asset class. Additionally, governments are still trying to determine the best way to regulate them.

What Is a Bank Run?

A bank run is a situation in which many customers of a bank or another financial institution withdraw their deposits simultaneously due to concerns about the solvency or viability of the institution.

Bank runs typically happen when many customers lose confidence in a bank and believe it may be at risk of failing. 

This can happen for various reasons, such as rumors or reports of financial mismanagement, concerns about the bank's ability to meet its financial obligations, or a general loss of confidence in the financial system.

When a bank run occurs, it can create a self-reinforcing cycle in which more and more customers withdraw their deposits, putting further strain on the bank's finances and increasing the risk of failure. 

If a bank cannot meet its customers' demands and is forced to close, it can create a domino effect and cause other banks to fail as well, leading to a financial crisis.

Governments and central banks often provide deposit insurance to prevent bank runs, guaranteeing that depositors will receive their money back even if the bank fails. 

This can reduce the likelihood of a bank running by giving customers confidence that their deposits are safe.

Central banks can also provide financial support to banks during times of crisis to help them meet the demands of their customers and avoid failure.

Conclusion

Crypto exchanges enable users to trade crypto, and while they may be regulated in the US to a certain extent, the crypto market is generally largely unregulated.

Bank runs can occur when a large majority of users try to withdraw their funds simultaneously.