The Bahamian Securities Commission reported this morning that they were freezing the assets of FTX Digital Markets after a week which saw the exchange face a liquidity crunch, a potential bail out by Binance and then Justin Sun, and an relentlessly upbeat tweets from SBF apologizing and promising to fix the problem.
FTX Australia, a wholly owned subsidiary of FTX Trading Limited, announced this afternoon that it had appointed administrators to take over the company, and that it was co-operating with the regulator ASIC, to secure the best outcome for Australian clients.
The sudden implosion of FTX underscores the need for fit for purpose regulation of centralised exchanges, which should as a matter of good practice be segregating client assets and keeping those assets in safe custody. Rumours have been circulating that FTX Trading / FTX Digital Markets user assets were not properly segregated, and more information as to the goings on inside the exchange may come to light.
The Australian Blockchain industry has been advocating for custody rules for exchanges for over a year, on the basis that such rules would help require the segregation of assets and protect customers in the event of an exchange collapse.
Standards have been proposed by the regulator ASIC for exchange traded products in Report 705, and in the recent CASSPr discussion paper. However, the only exchange traded funds, Cosmos, used synthetic derivatives, not spot holdings, so did not have any compliance obligations around custody.
The only retail crypto funds in Australia which would be required to apply these custody standards, were the subject of stop orders when ASIC recently alleged that the target market determinations accompanying those funds were not compliant, and it is unclear just what changes would have been accepted as compliant by ASIC for those funds to continue to operate. The fund issuer, Holon, published their entire chain of correspondence with the regulator to highlight the strange situation.
In the US, a bill backed by SBF which seeks to increase regulation of exchanges under commodity market monitoring is moving forward, despite opposition and claims it was 'dead'. The fallout from FTX's failure is likely to continue, with BlockFi announcing a pause to withdrawals a few hours ago in light of the situation with FTX.