The crypto market is trying to pick up the pieces after it was thrown into massive disarray last week when the previously third-largest crypto exchange, FTX, imploded and filed for bankruptcy.
“It’s obvious that people are jittery, interested and somewhat nervous about what’s happening in the industry,” Changpeng “CZ” Zhao, CEO of Binance. the largest crypto exchange, said during a Twitter Space on Monday. “I want to say, short term it is painful. But, I think this is good for the industry long term.”
Zhao acknowledged that a lot of people lost money recently and many still have money stuck with FTX, so “there will be pain.” But he hinted that market conditions should improve down the line.
“The industry is not going away and the other strong industry players are now even stronger,” he said.
Last week, a number of crypto exchanges, including Binance, Crypto.com, KuCoin and OKX said they would begin publishing proof of reserves in an effort to reassure customers and investors that their funds are safe in the wake of the FTX debacle. Last week, Zhao emphasized the importance of transparency, tweeting, “All crypto exchanges should do merkle-tree proof-of-reserves.”
Proof of reserves (PoR) are independent audits by third parties that aim to provide transparency and evidence that a custodian holds the assets it claims to own on behalf of its clients.
These exchanges join other crypto businesses like Gemini, BitGo and Paxos, to name a few, which have used PoR for many years to prove billions of dollars in value, Sergey Nazarov, co-founder of Chainlink, told TechCrunch on Friday.
“Now we’re increasing transparency in the industry, we’re increasing security in the industry, and we’re increasing communications with regulators all around the world,” Zhao said today. “I think five years later, when we look back at this, the industry will be stronger.”
Just six days ago, Binance signed a letter of intent to acquire FTX. But within a day, Binance backed out of the deal after reviewing FTX’s structure and books.
For reference, Binance previously had equity in FTX, but exited the position in 2021 for about $2.1 billion of Binance USD stablecoin and FTX’s native token, FTT. On November 6, Zhao said in a thread of tweets that Binance was liquidating its holdings of FTT in a way that “minimizes market impact.”
Of course, as events unfolded, Binance’s plan to not shake up the price of the token didn’t do much to minimize its impact on the market. FTT has plummeted 94% to $1.35 from $23.1 a week ago, CoinMarketCap data shows. “We sold a small portion of [FTT]; we still have a large bag,” Zhao said during the Space.
“As much as people blame me for whistleblowing or poking the bubble, I apologize for that, but I didn’t know my tweet last week would cause so much change,” Zhao said. “It may or may not have been the Tweet that caused it, to be frank; I don’t want to claim too much credit. Regardless, I apologize for any turmoil that caused.”
But any time there’s a problem within the crypto industry, the earlier it’s revealed, the better, Zhao added.
“Kicking that problem [down the road] for longer and not saying anything about it is probably even worse,” Zhao said. “So we will try to achieve a good balance between whistleblowing, causing panic and causing prices to drop, etc., and building a healthy industry and cleaning out the bad players.”
Going forward, Zhao said Binance will work closely with other crypto exchanges and industry players. He noted that there are initiatives being formed to “reduce further cascading negative effects of FTX,” like its industry recovery fund, which he announced in a tweet this morning.
About four to five unnamed funds already want to participate in providing capital for the fund, Zhao said. “The names will be released when it happens.”
“We are also trying to form a global industry association of the big players in the crypto space to maintain communication with regulators as well as best practices in the industry,” Zhao said. The association would aim to emphasize the importance of PoR and transparency, and act as a point of communication on policy, thought leadership and so on.
“This has been requested by multiple regulators,” Zhao noted. He added that the association would not be run by Binance but by a third-party company that has managed these types of associations in the past.
“A lot of positive things are happening in the industry. We have a few negative ones, but a lot of positive things are happening.” Zhao said. “I’m actually very confident about the future of our industry.”
Over 40,000 people tuned into the Binance-hosted Twitter Space on Monday. To be honest, that’s the largest Twitter Spaces I’ve ever seen happen (apart from Musk’s recent free-for-all with advertisers) and speaks to the overwhelming interest and demand from the crypto community for answers and clarity.
While there are initiatives both by Binance and other industry participants to move forward from this moment, there will be cascading effects from the FTX situation that will impede the crypto industry for months to come as retail and institutional players try to recover.
Whether these words of comfort will help and last in the long term is yet to be seen.