“Not your wallet, not your crypto”: how the FTX collapse will change crypto trading forever

“Not your wallet, not your crypto”: how the FTX collapse will change crypto trading forever

How big is the impact of the FTX collapse on the crypto market? And what role does ‘cold storage’ play in future investing? Belgian crypto entrepreneur Pieter Aerts offers an explanation.

Why is this important?

According to Belgian crypto entrepreneur Pieter Aerts, FTX “will not be the last corpse to fall out of the closet”. The use of cold storage – tech that allows keeping access keys to crypto coins offline – will be crucial in the coming years.

The essence: “Blockchain tech has not failed.”

  • According to Aerts, the current crumbling of the crypto market can only be attributed to the collapse of FTX . “On the crypto-technological level, nothing has actually changed.”
  • Bitcoin’s price has correlated fairly closely in recent months with the S&P 500, a stock index of the 500 largest US companies. “Now we see a decoupling between stocks and crypto. These are aggravating circumstances for the crypto market.”
  • The crypto pioneer believes we are witnessing a waterfall effect, referring to the implosion of crypto currency LUNA and lender Celsius earlier this year. “FTX won’t be the last corpse to fall out of the closet,” he says. “Many companies kept their treasury on FTX or had funds there that were needed to perform certain services. These companies now have a big gap in their accounts.”
  • According to Aerts, central exchanges are not part of the fundamentals of crypto. “The roots of crypto means that you will manage and own your own coins. When a third party is involved, there is actually no question of decentralization anymore.”
  • The use of cold storages will therefore be increasingly adopted in the coming years. These are crypto wallets on an external hard drive, disconnected from the internet when no funds are being transferred. “You are the only one who holds the keys and you avoid losing your assets.”

The Big Picture: A win for DeFi.

  • FTX’s collapse is a victory for DeFi. These are decentralized applications on blockchain that convert financial products into transparent protocols, without having to rely on intermediaries. “Because of what happened, more transactions are likely to take place on decentralized finance platforms (DeFi) than on central exchanges,” the crypto pioneer thinks.
  • Earlier this month, banking giant JPMorgan completed its first-ever DeFi transaction on public blockchain, marking a major milestone for the crypto world. In doing so, the major bank converted 100,000 tokenized Singapore dollars into Japanese yen.

The consequences

In the future: The collapse of FTX could be decisive for crypto regulation.

  • “It has been years since we have seen such events,” says Aerts. “The collapse of the world’s second largest crypto exchange is sending a shock wave through the crypto world, so to speak. Its impact will undoubtedly be great.”
  • He refers to the regulation that followed the banking crisis in 2008. “Then banks were bound by strict rules so that the excesses of the financial crisis could not be repeated.” According to Aerts, customer deposits from crypto exchanges could be managed by traditional institutions.
  • However, it is not the intention that institutions gain more control in this respect. “The functions that centralized exchanges currently perform can also be perfectly performed on the blockchain using DeFi protocols,” says the crypto pioneer.

The big wake up call: The use of cold storages will be crucial in the coming years.

  • With the tech of cold storages do you avoid a scenario like with FTX where customers’ coins are in the cold wallet of the company, and were therefore not actually under the control of users.
  • The use of cold storage is safe as long as you seed phrase store well. That’s a code you have to keep to recover your wallet when you lose the login details.
  • The problem with that: at the moment its use is not very user-friendly and often a bridge too far for the average customer, says the crypto pioneer.
  • Noticed: Binance decided to invest in for the first time earlier this week cold wallets. To this end, the fair has joined forces with the Belgian NGRAVE: the first and only company whose cold wallets have the highest security certification (EAL7).

A digital euro?

Below the radar: What about CBDCs?

  • Central banks worldwide want to roll out the use of CBDCs (central bank digital currency). These are digital versions of physical currencies such as the dollar and euro, with which we may later carry out our transactions.
  • Some 90 central banks are said to be busy launching their own digital central bank currency.
  • “It looks like banks will set up their own network to control that technology,” says Aerts. “At the moment, centralized crypto exchanges do that, but in principle a bank can do that perfectly.”
  • The international payment system SWIFT announced earlier in October that it wanted to apply the innovative payment system in Europe.
  • According to Aerts, that revolution is not part of the crypto picture. “Cryptocoins should be decentralized. This is not the case with a digital central bank currency. Relinquishing absolute control over digital money to a central party that can determine everything seems very dangerous to me.”
  • “The bank itself may never withdraw cryptocurrencies, but only the conversion from fiat money to stablecoins (crypto coins that mimic the price of fiat money and are issued by private players) that support the blockchain technology,” concludes the crypto pioneer.

With contributions by Jeremy Van der Haegen.