Unregulated Crypto Custodians Cannot Be Reliable for Your Digital Assets – Here’s Why

Global financial failures are common. However, in today’s Web 3.0/blockchain economy, it is untenable to ignore the financial industry’s significant advances over the past two decades and repeat old mistakes. Traditional finance generally blames the bank when things go wrong. Where did digital assets go wrong?

Due to market bankruptcy, 2022 was a difficult year for the cryptocurrency sector. FTX, a $32 billion cryptocurrency exchange, collapsed. Its founder, the famous Sam Bankman-Fried, is the crypto figure of the year. When will unregulated custodians involved with companies like FTX start being held accountable when exchanges go wrong? Most of the banks have used inadequate governance techniques such as account management, mutual funds, custodial defaults and many more.

The housing disaster a decade ago was caused by a run for banking and securities.

Despite these missteps, the public trusts TradFi (traditional finance). Despite managing billions of dollars in user assets, most crypto companies are unregulated. While these organizations are not required to secure their clients’ money, they should be held accountable when things go wrong.

FTX and Alameda Research stole hundreds of millions of dollars when the company went bankrupt. The move was to protect $400 million from bad actors. However, the fact that key people who had left the company, including founder Sam Bankman-Fried (SBF) and CTO Gary Wang, were able to move so much money irritated investors and demonstrated a lack of acceptable control on both FTX’s and their side. partners.

Fireblocks, the custodian of unregulated crypto, reviews all FTX transactions during FTX issues. The company’s valuation stands at $8 billion when a Series E investment round raises $550 million in 2021. Traditional banks must disclose money laundering under the Bank Secrecy Act. The unregulated operation of Fireblocks allows FTX to bypass SBF and its counterparty fund transfers.

According to media reports, the Fireblocks team set up multiple emergency wallets without informing the new FTX administration about the source of the cash. According to the court petition, the new FTX administration seized FireBlocks funds without accountability. More regulatory oversight of the digital asset market will make embezzlement of these funds even more difficult.

Pro-crypto advocates have been pressing regulators to clarify the space for years.

Digital asset entities want to operate freely like traditional financial institutions. The crypto market must follow traditional financial trust and accountability while debating the viability and long term utility of crypto and DeFi. Custodians must also behave as fiduciaries and disclose their relationships with exchanges and market makers, including banks. While some argue that extensive regulation will be bad for crypto, unchecked custodians pose a major risk to the growth of this asset class.

Regulated crypto custody, like banking regulation, is critical to industry growth and maturity. So, as we move towards decentralized technology, the crypto market must adapt and accept the rules to protect its users.