Between 2018 and 2020, the international cryptocurrency user base grew by nearly 190%. Crypto’s total global market capitalization peaked at over $2.9 trillion in November 2021. However, by December 2022, it stood at just $798 billion.
FTX’s downfall in November 2022 was one of the key events that had a domino effect on the global market value of cryptocurrency. Investor trust in the cryptocurrency market was greatly shaken, and the total value of consumer investments lost by the now-defunct platform amounts to $8 billion.
In this blog, we understand what went wrong and how access to self custody can give investors complete control over their digital assets, which are at present primarily held at centralized exchanges (CEXs).
Lack of Liquidity
FTX grew to become one of the world’s largest CEXs, with over 1 million users. Owned by Sam Bankman-Fried, the exchange had built a high-consumer trust reputation, thus attracting both retail consumers and businesses to invest in crypto.
However, as the crisis unfolded, investors in FTX panicked, and there was a rush to withdraw their investments. When they were unable to do so, this triggered further apprehension and instant loss of trust.
FTX admitted that it had a liquidity challenge. Within two days, FTX’s value fell by 80%. Crypto investor sentiment around the world suffered, and the overall value of crypto plummeted.
Binance, the world’s largest bitcoin and altcoin crypto exchange, started talks with FTX to purchase the exchange. However, after Binance did its due diligence, the deal fell through.
Lack of Transparency
Unknown to investors, FTX had offered a line of credit to its sister company Alameda Research. They were using consumer investments to fund this line of credit without seeking permission from investors.
According to Reuters, customer funds to the tune of $1 billion vanished from FTX. Founder Bankman-Fried allegedly transferred $10 billion of customer funds from FTX to Alameda Research without revealing this information until it was uncovered in records he later shared with other senior executives.
According to Bankman-Fried, the funds were not transferred secretly. He blamed the narrative on “confusing internal labeling” that led to a “misread.”
FTX’s legal and finance teams, on closer examination, discovered that Bankman-Fried had implemented a “backdoor” in FTX’s bookkeeping system, which had been built using bespoke software.
Role of Self-Custody
Self custody means that the investor is the only authority who can authorize a transaction of digital assets, such as digital currency, as they are in control of it via a private key’s.
Using a self-custody wallet is a straightforward, seamless operation, similar to using an app with additional security measures. One can use a hot or cold wallet, though a cold or hardware wallet offers higher security.
For instance, a multi-sig wallet is an important tool to protect digital investment’s it is like a safe or vault, which requires multiple private keys to activate a task or transaction. It thus offers an added layer of security with self custody.
The aim of a multisig wallet is to enhance the security of the assets stored in the wallet by requiring more than one party to sign off before a transaction takes place. The transaction will not go through without multiple cryptographic signatures associated with the wallet.
Such tools already exist in the crypto ecosystem. Yet, FTX failed to offer this easy safeguard to its consumers.
Considering the FTX debacle, self-custody with some added layer of security, like a hard wallet or a multi-sig wallet, can be a potential solution.
YPlusVault, Yodaplus multi-sig wallet, offers individual and institutional investors a means for easy management of digital assets. It is one of the most secure high-trust wallets that can be leveraged to manage all new-age digital transactions seamlessly.