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The crypto space has been going crazy ever since the markets started plummeting in May. The beginning of the market crash was due to the Depegging of the Terra LUNA crash that took place, however, the recent FTX fiasco has taken the centre stage, as it has not only lost its own funds but ended up losing funds of its users, VCs and much more. With the FTX incident still unfolding, it is important that the crypto space understands why what has happened. To answer few of the most important questions that has been occurring to most of us, Sumit Gupta, CEO and co-founder of CoinDCX, sits with Kashif Raza of Bitinning!
What Caused the FTX Collapse?
This incident started to unfold when the popular crypto news publication, CoinDesk published an article that revealed the balance sheet of FTX’s sister firm that dealt in the hedge fund business – Alameda Research; back in November 2, 2022 According to the documents presented, it was found that Alameda held billions of dollars worth of FTT, FTX exchange’s native crypto token. And it doesn’t stop there – in fact those FTT tokens were further put up as collateral to raise further debt – something that wasn’t revealed to the public.
SCOOP: Sam Bankman-Fried’s @AlamedaResearch had $14.6 billion of assets as of June 30, according to a private document CoinDesk reviewed. Much of it is the $FTT token issued by @FTX_Official, another SBF company.@IanAllison123 reportshttps://t.co/9kigf7VXph
— CoinDesk (@CoinDesk) November 2, 2022
Soon the news of Binance acquiring the FTX surfaced and within 24 hours, the fastest pullback the world has ever seen, Binance announced that it has changed its decision and is now pulling back on its offer. When asked for the reason, Binance made a series of tough allegations against the crypto exchange that further triggered the FTX collapse. The reasons were ranging all the way from mishandling customer funds, and US agency investigations. Around this time, more and more information and reports began emerging from within the firm regarding habitual drug use and misappropriation of funds on a grand scale.
While all of the reports and allegations triggered in-depth investigations, by November 11, 2022, the FTX collapsed. In a formal press release, FTX announce that it is finally filing for Chapter 11 of the United States Bankruptcy Code in order to begin an orderly process to review and monetize the remaining assets of the firm for the benefit of all global stakeholders in the company.
Press Release pic.twitter.com/rgxq3QSBqm
— FTX (@FTX_Official) November 11, 2022
CoinDCX’s Take on the FTX Collapse
In the open house, Kashif asked the very question a lot of the crypto community members had been asking. How much exposure did CoinDCX have in FTX? A very basic question generated the answer that is the very core of CoinDCX as a brand. CoinDCX is a customer-first company. As much as the steps that the brand is taking have been very calculative and compliant, it has made sure to never look at the solutions that have even a minute probability to bring negative impact to the customers. Sumit said, “In all of the incidents that the crypto space saw in 2022, CoinDCX had zero exposure.” The customer funds are left as it is coupled with the $100 million insurance from BitGo.
Apart from manipulating the customer funds by keeping FTT tokens in its balance sheet, FTX did not only dupe their VCs, but also triggers the spiraling effect it had on their customer funds! Moreover, having the access to the wallets within the company CEO was a major mistake a red flag, with respect to being an exchange. It should never have been the case in the first place!
Looking back at how the processes of the FTX funds allocation and management affected its current situation, Kashif also raised another customer query; with the significant drop in trading volume for multiple reasons, how is CoinDCX managing the salary of its employees? Has it ever triggered the question of using the customer funds to make their way? As a response to that, Sumit ensured, “We have a runway that is good for another 4 years, minimum.” CoinDCX has a very public record of its funds and what they have raised all through their 5 years of journey. With a comfortable bed for the company to stand on, the management has state-of-the-art security set in place for the cold wallets and the keys and ids that ultimately hold access to user funds. As a response to this persisting problem in the DeFi world, the brand has also started working on a new product that works as a bridge between the CeFi and the DeFi world.
The FTX collapse has not only shaken up the crypto enthusiasts but has also triggered some very less effective ways which should be ignored while establishing an exchange. One more reason to be added in CoinDCX’s tireless effort to see the crypto space regulated. More compliant and regulated space will be an effective guardrail for negating incidences like the FTX one in the future! CoinDCX as a brand operates with the thought process of being a regulated entity, taking ownership of all its efforts and actions towards the service that they provide its customers.
Read in detail on: FTX Collapse
CoinDCX’s Operating Methods:
As the crypto industry faces another liquidity crisis, it becomes important to understand the practices of risk management, transparency, and consumer protection CoinDCX abides by:
- CoinDCX never exposes user funds to price and credit risk
- CoinDCX does not have a native token
- Risk Management is an integral part of CoinDCX
- CoinDCX is fully audited
Our approach is to support the Indian crypto industry in a responsible manner, be self-compliant, and aim to keep our users informed and protected to the extent possible.
Read more here.
What is Proof of Reserve and Liabilities?
After the FTX incident and the misled balance sheet, the market in general has been very keen on the Proof of Reserves and liabilities. So to put it in simple words, Proof of Reserves is the idea that custodial businesses holding crypto should create transparent attestations as to their reserves, matched up with proof of user balances (liabilities). Below mentioned are the pointers Sumit has shared as his 2 cents on the PoR and liabilities of your beloved crypto brand:
- CoinDCX has an order placement system that ensures that assets bought by the users are 1:1 placed under vaults on/off-chain, especially warm/cold wallets. This ensures that for every order placed by users, CoinDCX actually buys or holds crypto assets.
- In our opinion, the much advocated “Proof of reserves” provides a standalone asset value, it only showcases one side of the part. There’s no visibility of liabilities. Proof of reserve without Proof of liabilities is only half the picture.
- So let’s take it one step ahead and ensure this with the Reserves to Liabilities (R2L) Ratio: Total assets owned (on/off-chain) / Total liability & contingencies.
For example, if an exchange has $100 of assets held by users, and liabilities amount to $150, then the Reserve to Liability Ratio is 66% which is quite low. A good risk management & customer protection practice is to have at least a 100% R2L ratio.
Here is the Reserves to Liabilities ratio snapshot of the top ten assets that we hold on behalf of the users as a % of what we owe to the users.
Read more here.
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