Opinion – Grain in Grain: FTX broke; two experts say what will happen to customers

The bankruptcy filing of the world’s second largest cryptocurrency exchange renews investors’ uncertainties about this industry. The incident took place this past Friday. At this point, many traders are confused, as they believed that their biggest risk was just the intense price swing of cryptos, but they realized that the uncertainty goes much further. I interviewed two experts who explained the main doubts of FTX cryptocurrency investors.

According to Bruno Milanello, Crypto Asset Specialist at XTAGE, trust is the key element in this market. However, recent attacks hackerfraud and now bankruptcy have shaken it.

To understand how the crypto world is different, let’s compare it to the traditional one. When investing in stocks through a traditional brokerage firm, there are three institutions to act in the security of your assets. The first is the broker, the second is the custodian and, finally, the bookkeeping institution.

If a traditional stockbroker goes bankrupt, nothing happens to investors’ assets, as all stocks are held in a different institution. Therefore, there is a segregation between the broker’s assets and those of its investors.

Even if the brokerage house and the custodian institution, which in the Brazilian case is B3, go bankrupt, the bookkeeping agent still has a record of all assets, identifying each investor. Therefore, the applicator would not suffer.

The same does not happen with cryptocurrency exchanges in the world. As Luis Mitsuo Shimabukuro, Head of Commercial at Mercurius Crypto Enterprise, says, crypto exchanges are both brokers and custodians.

That way, if the assets are in the brokerage, they are not yours. Mitsuo recalls, “In crypto, there’s the familiar jargon about custody, not your keys, not your coinsthat is, if you don’t have the key to your crypto assets, you don’t have them”.

Milanello explains that “as this is not a regulated business, it is not clear, in the case of FTX, in which jurisdiction the case will be evaluated and what criteria will be taken into account. In practice, this means that there is no guarantee that the assets of customers are safe and secure until that time”.

So, considering the indebtedness of the FTX crypto exchange, if you have cryptos held by them, you are at serious risk of not getting anything back. Investors, possibly, should go into bankruptcy like any creditor.

The episode opens up the risk that investors are exposed to in any crypto exchange in the world.

In the crypto market, investor protection resides only in the strength of the broker’s controller, that is, it will be lower the more susceptible the controllers are to a crash.

But, how to identify the solidity of the controller if almost all of them are closed companies that often do not even have audited balance sheets?

In this sense, Milanello explains that the event “opens up opportunities for solid groups such as XP which, through XTAGE (XP Inc.’s digital asset trading platform in a technological partnership with Nasdaq) provides investors with the state of the art in security , transparency and cutting-edge technology”.

Both experts, Mitsuo and Milanello argue that the episode is an incentive to regulate the sector.

Everyone complains about the regulation and centralization of the traditional financial market, but it’s only when you lose all your invested capital that you miss these characteristics.

Until there is complete regulation of this industry, insecurity prevails. However, I leave a question for readers to comment: when there is complete regulation, what is the advantage of this market compared to traditional assets that yield interest and dividends?

Michael viriato is an investment advisor and founding partner of Investor’s House

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