FTX: Crypto exchange failure calls for regulation

After the crypto exchange FTX shut down, more than a million people and businesses may be owed money, according to bankruptcy filings.

There have also been rumors that hackers broke into FTX and stole cryptocurrency worth millions of dollars.

There is much to worry about for people with money in the business.

Experts and financial watchdogs warn that consumers don’t have much protection in the UK because there are few rules about crypto assets.

Even though regulators have made it clear that investing in crypto has risks. About 6.7 million people in the UK own or have bought cryptocurrency assets. This is about 10% of the people in the world.

In September, a group that keeps an eye on finances called the Financial Conduct Authority (FCA) issued a warning. That FTX could sell or offer financial services in the UK without permission. “If things go wrong, you probably won’t get your money back,” it said.

It now has a page about how the FTX is closing down. But again, the message is that those who have put money into it have few options.

FTX loss in summary

At least, FTX’s creditors will get what’s left of the company through a process called “liquidation.”

Gavin Brown, an Associate Professor in Financial Technology at the University of Liverpool, pointed to a recent report saying, “42% of failed exchanges simply disappeared without a trace.”

But bankruptcy might not make you feel much better.

Fewer options

The Financial Conduct Authority (FCA) says that people  should go to Moneyhelper, which the government backs. But Moneyhelper is a service that gives advice, so it can only tell you how to live if you have no money.

If a bank or building society goes bankrupt, you can get your money back through the Financial Services Compensation Scheme. This is true for some joint investments (FSCS). However, the FSCS says it doesn’t protect crypto assets because they are not regulated financial products in the UK. So all it can do is warn consumers about the risks and give them ways to check if the scheme protects their investment.

The company says customers ask about cryptocurrency weekly through its customer service team, on social media, and when they look for information on its website.

It says that “crypto” is one of the most-looked-up words on its site.

Not much to choose from

Regulators like the Financial Ombudsman Service don’t have much power over crypto assets, with a few exceptions. So, unlike with other products, consumers need a clear right to act before they can do anything.

Consumers could file a civil claim against a broker or another party involved in an investment. But if the investments didn’t go as planned, they could only do a little to compensate for their losses.

The Financial Services and Markets Bill will start to add more crypto rules. But in the meantime, people who wanted to invest were still taking a risk.

Read Also: FTX collapses into Chapter 11 bankruptcy

Haider Rafique, who works for OKX, a crypto exchange, said that customers could take some steps to avoid losing money in the same way in the future. Mostly by being careful about where they kept their money and other valuables.

Benjamin Dean, who runs a company called WisdomTree Investments that manages assets, told people to think about blockchain-related investments the same way they think about stocks, shares, or gold investments.