bereajoy： Why Bank Runs Spell Trouble For Crypto Exchanges
Why Bank Runs Spell Trouble For Crypto Exchanges
When FTX collapsed, of course, it was because of the malpractice and misuse of funds, but the kill shot was a bank run. Everyone who got the news wanted to withdraw their funds from FTX all at once, and the exchange could barely accommodate that, so it stopped withdrawals. It caused further panic that left no other choice for FTX but to file for bankruptcy.
Also Read: A roundup of FTX’s sports deals that collapsed with the exchange
Banks and crypto exchanges can both face bank runs, but they’re quite different. Banks have regulatory bodies, and the government overlooks them and comes to their aid when something goes wrong. This happens because if one bank collapses, it might have larger repercussions across the financial system and cause other bank runs.
The crypto market is unregulated, and the government’s care with crypto is limited to taxing it today — there isn’t any help offered to exchanges in the form of bailouts. As a result, crypto exchanges need to have all of their reserves readily available instead of a percentage of them in the case of banks. When exchanges fail to uphold this proposition, things get troublesome.
Moreover, as per reports, the crypto exchanges do not have sufficient liquidity to cater to a huge surge in withdrawals. The liquid cash available with them is minimal compared to the assumed value of cryptocurrencies held by them in their digital wallets on behalf of investors.
Conclusion
Binance has recently come up with a solution in the form of proof of reserves for crypto exchanges to tackle the problem of bank runs. Their CEO also acknowledged that crypto exchanges do not have the liberty to keep partial reserves or use client funds for anything but safekeeping, and hopefully, that’s an example set for the rest of the industry.
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