FTX Saved Crypto

I flew to Washington D.C. yesterday and spent today among bankers, regulators and financial crime experts. Over the course of the day and many conversations, one thing became increasingly clear: We owe a debt of gratitude to?Sam Bankman-Fried.

FTX’s collapse and its cascading effects have effectively created a watershed moment for digital assets. It's woken up the public, legislators and regulators to the urgent need for industry guardrails.?

As we’ve seen frequently through modern history, financial crises ultimately lead to effective regulatory oversight. While deeply painful, the failures of Enron and Lehman Brothers became catalysts for more robust risk management practices, stronger capitalization and deeper liquidity across banks and financial institutions.?

It could be the same for FTX's collapse. Let's take the advice of Winston Churchill and "Never let a good crisis go to waste."

The way I see it, the path forward is to collectively acknowledge:

• Digital assets are a class that has already become part of the fabric of our financial system.
• Self-regulation is insufficient. In the absence of robust supervisory controls, effective risk management is too easily overlooked or ignored.?
• Regulation and innovation do not need to be mutually exclusive. Regulation can evolve as innovation grows.
• Digital assets share enough similarities with traditional assets that it is possible for governments and legislative bodies to leverage existing regulatory frameworks. In essence, apply the same controls to digital assets that we do to the dollar.
• Creating a separate framework for a “special” asset-class would prevent our financial institutions from applying existing supervisory controls to protect consumers and lead to regulatory arbitrage.??
• Digital assets are already part of our future. The ability to move enormous amounts of value instantaneously is here. Beyond crypto-assets we are creating tokens of equities, debt and even kilowatt hours. Will the EPA be tasked with monitoring illicit funds activity? Bad actors will always target agencies with the least resources.
• Traditional banking services, such as custody, servicing, escrow, and conversion are agnostic to customer asset types. The debate on capital reserve requirements should focus on whether assets are held on-balance or off-balance sheet. The risks attributed to assets held in a simple digital safety deposit box are not comparable to loans collateralized by a highly volatile asset.

These are basic points that have been ignored or overlooked for too long. The fact of the matter is that right now enormous crypto-asset value can be placed onto a USB drive and physically handed to another person without regulatory oversight. The bearer nature of this action highlights how easily transfer controls can be circumvented.

What happened with FTX has been devastating for too many. But the potential for more broad and long-lasting damage hangs over us when bad actors can transfer currency with impunity.?

There will always be evangelists and idealists who will continue to argue for an unregulated playspace for innovation. But FTX has shown us a glimpse of where that road leads. The way to nurture innovation and support the growth of an asset class that has tremendous appeal for many is to embrace pragmatic regulation. Thankfully, these sentiments are increasingly being echoed by prominent public sector leaders. As we heard from U.S. Treasury Secretary Janet Yellen last week, "I think everything we've lived through over the last couple of weeks, but earlier as well, says this is an industry that really needs to have adequate regulation. And it doesn't."?

The good news: The solution is right in front of us. With existing blockchain technology, we can verify the provenance of assets, monitor transaction activity, and identify high-risk value transfers. The process would allow digital assets to become bankable assets.?

A well-designed system that bridges digital assets and the regulated banking industry clears the path for banks and financial institutions to protect consumers while also providing room for choice and innovation. And it creates a stronger, more secure financial system overall.?

With political will and industry support, this can be a relatively straightforward process.?

Now that SBF has given us this crisis, let's not waste it. Let's get to work.