Can Investors Trust Centralized Crypto Platforms Anymore?

The entire debacle surrounding FTX has been an eye-opener to many in the crypto market. It made many realize that any platform can really disappoint when it comes to the basic tenets of safety and reliability and that investors might truly be better off just holding their assets on their own.

Considering the nature of the entire debacle, many have wondered whether it is truly worth trusting cryptocurrency exchanges and other centralized platforms anymore. It appears clear that there is a circulation of funds going on between many of these platforms, and that they aren’t generally to be trusted because failure for one could easily lead to a contagion effect.

So, how did we get here, and what do centralized platforms have to do to win back the public trust?

A Cascade of Events

It’s easy to blame the current erosion of trust in centralized platforms on FTX – and, to be fair, anyone who does is definitely not missing the mark at all. However, the once-great exchange isn’t the only platform that should be blamed here.

2022 has been a truly rough year for the entire market. After witnessing an unprecedented bull run in 2021, many believed that crypto was on the precipice of momentous growth this year as well. Sadly. Things didn’t necessarily pan out, and a massive bear market ensued.

The effects of the bear market soon started to expose platforms with structural and operational weaknesses. The Terra stablecoin ecosystem was the first to go, crashing entirely and causing a massive ripple effect that soon started to affect other companies.

Terra was bad because investors had truly believed in the ecosystem. Many of them went ahead to stake the platform’s native LUNA cryptocurrency – a process that essentially locked their coins within the protocol for a lengthy period. So, when LUNA started to crash, these investors had no way to move their funds quickly. It was either they held firm to try weathering the storm or resort to other lengthy means – which were also not advisable since the crash was sporadic.

At the end of the day, the entire ecosystem – which was worth over $40 billion at its height – evaporated in a few days. Terra is now a shell of itself, with the ecosystem being devoid of any developers or real members – only those who have the asset and are hoping that it could miraculously surge again when the bear market comes to an end.

FTX – The Fuel to The Fire

The market’s early crash was pretty bad, but at least investors believed that this would be the end of it. Suddenly, things took a massive turn for the worse in November when reports showed that FTX – one of the largest exchanges in the market – had suffered significant losses due to its exposure to Alameda Research; the hedge fund started by its founder, Sam Bankman-Fried.

A massive bank run happened on FTX, leading to billions of dollars worth of funds being moved from the exchange in less than two days. A planned acquisition by Binance – FTX’s largest competitor and a one-time investor – failed as the latter found that FTX’s liabilities were much worse than initially thought. And in less than a week, FTX collapsed entirely.

FTX Impact

The fall of the FTX empire was a massive awakening for the market. Over a million customers were affected, while the company’s executives continue to deal with the possibility of making some customers whole.

Just as well, it is worth noting the contagion effect that it has had. FTX was one of the biggest names in crypto, with connections to several other companies and platforms. When the market downturn first began, it stepped in to save several distressed companies by offering them bailouts. BlockFi, Voyager, and many more got lines of credit from the company in order to keep their operations going. Now that FTX is gone, these companies are also finished.

There are also companies that had funds in FTX before it crashed. Several of them have had no way to access their money, meaning that they have had to resort to drastic measures to keep their operations.

Then, there are those who now question the strength of companies like Binance and Coinbase as well. After all, if FTX could fail, what’s stopping these other giants from doing the same?

How Does Public Trust Get Maintained?

Since the FTX saga began, more experts have counselled for self-custody – essentially, taking your funds off exchanges and into decentralised wallets. While this is a good move, however, it also can be a difficult process for many in the market to understand.

Centralized exchanges and platforms have now been faced with the question of how best to maintain the trust of their customers. The first step will be to publish a proper roof of reserves, which shows that their funds actually exist and that their liquidity is strong. Sadly, several top exchanges have had issues with even that as well.

The next step would most likely be to get prepared for a possible worsening of the market conditions in the near term. There is a sense that more shoes will drop before this entire saga is over, and these will most likely affect the prices of coins down the line. So, to be able to weather the storm, companies need to practice proper financial due diligence and management.

The key is understanding that trust isn’t given; it’s earned. And for a company to be able to win back the trust of the public, it will need to show a certain level of reliability that builds over time.