The scandals of recent years have taken a profound toll on the credibility and trust of the cryptocurrency sector. However, with the SBF trial behind us, Binance’s settlement with the DoJ, and the promise of a Bitcoin ETF creating a positive buzz in the markets, it feels like the industry is at a pivotal moment.

The biggest question is: how can we restore trust in a sector where bad actors have run rampant with customer funds? How can people learn to differentiate between a reputable, bank-backed platform like MultiBank.io and an FTX? What’s the surest way to know that funds are safer in Uniswap than in Terra LUNA?

Red Flags

With the benefit of hindsight and the sheer depth of reporting that has gone into the collapses of 2022, several trends and warning signals emerge that could serve as red flags for the future.

One example is the approach to regulation, in light of the fact that exchanges such as FTX have deliberately selected locations for their headquarters that are known for being low-regulation, such as the Bahamas or the Seychelles. Binance became infamous for not having a headquarters at all, and it was no secret that the firm operated extremely lax compliance procedures prior to around 2020, allowing users to trade without undergoing KYC.

Seeking to avoid regulatory oversight should be viewed as a red flag since even if the organization has nothing to hide, the avoidance in itself could result in penalties that damage the company’s reputation and viability.

The close relationship between FTX, a cryptocurrency exchange, and Alameda Research, a hedge fund that was one of FTX’s biggest customers, should also have been a red flag. Despite verbal assurances from Sam Bankman-Fried that the two firms were separate, the reality was that they were heavily intertwined, with a significant crossover in leadership teams and beneficial ownership.

The lavish wealth that appeared to pump from projects like Terra and FTX could also have been better investigated. In January 2022, FTX raised $400 million in funding from investors, yet over the coming months, it would commit billions to prop up collapsing crypto firms while also subsidizing an extravagant marketing budget that included naming rights to the Miami Heat arena. When Terra’s Do Kwon tweeted, “Deploying more capital – steady lads,” the smoke-and-mirrors attempt to give an illusion of liquidity was quickly unmasked. Still, unfortunately, it didn’t cause suspicion to fall elsewhere.

While there are other warning signs that emerged from related catastrophes, such as Celsius and Three Arrows Capital, an overall theme is apparent. The scandals that have beset the crypto space over recent years center around unregulated, non-KYC platforms where the core teams had no compelling incentives not to scam their customers and investors. As many have pointed out – to SBF, it was just another risky gamble in his trading career.

Follow the Incentives

Incentives and game theory feature heavily in blockchain and cryptocurrencies, so perhaps the biggest lesson from the 2022 scandals is to apply the same rules when selecting exchanges and platforms. Skin in the game matters and the most trustworthy operators typically recognize what’s at stake – their reputation and license to operate. From this perspective, TradFi crossovers such as MultiBank.io make a compelling choice.

As a financial institution, MultiBank Group has been in operation since 2005, growing to serve over one million active customers from 25 global offices. Furthermore, the company has built its reputation on its approach to regulation, earning recognition as the world’s most regulated derivatives broker, with 14 regulatory licenses. Since 2022, the company has extended its offering into cryptocurrencies through the MultiBank.io platform, which is under the oversight of the UAE Virtual Asset Regulatory Authority.

In entering the digital asset markets, a company like MultiBank will hold itself to the same high standards as its business in the TradFi market to maintain its regulatory licenses and reputation for transparency and trust. Furthermore, companies like this have a clear opportunity to capture market share from competitors that could be perceived as more risky.

Demystifying DeFi

Navigating the DeFi markets can be trickier since DeFi still tends to be largely unregulated, so it’s not as straightforward as seeking out regulated operators with a TradFi slant. However, some of the signs are easier to spot – promises of sky-high yields are rarely sustainable, and the pretense of decentralization can mask self-serving founders.

Longer-established platforms such as Uniswap or Compound offer a blueprint for trust. Rather than promising unsubstantiated double-digit yields from opaque sources, they offer a sustainable share of fees and interest paid by legitimate users. The protocol token doesn’t have any utility in rewards or incentives; instead, it is used as a governance token conveying voting rights over the future of the platform.

Furthermore, there are signs that Uniswap may begin to incorporate compliance features. In October 2023, code for a new optional KYC feature was added to the project’s “Hooks” codebase, which allows third-party developers to propose changes. While the move caused disgruntlement in the privacy-centric corners of the crypto community, the move to allow permissioned pools could provide an additional layer of trust that’s more attractive for all types of users – not necessarily only institutional participants.

While it’s impossible to undo the damage created by the scandals of the last few years, it is possible to restore trust. However, that will depend on a combination of robust regulation and operators committed to maintaining the highest standards of transparency and compliance.

 

Disclaimer: The Industry Talk section features insights by crypto industry players and is not a part of the editorial content of Cryptonews.com.