Podcast Notes 📝: Kraken’s Jesse Powell on relearning lessons from FTX crash
Kraken’s co-founder Jesse Powell recently interviewed with Bankless, discussing how the crypto community could come together to rebuild trust in the industry. We summarized it
Kraken’s co-founder Jesse Powell recently interviewed with Bankless, discussing how the crypto community could come together to rebuild trust in the industry.
We liked it a lot and summarized his insights for your quick consumption:
Jesse goes into the history of when the first crypto exchange was hacked
- The first hack of Mt. Gox was in 2011 when private keys were compromised, and for years, the exchange’s wallet was being drained as it continued to be topped up with new client deposits. Overall, 600,000 Bitcoin were stolen.
- There were no other options for trading at the time, only some OTC trading. The industry needed other exchanges.
David Hoffman, co-founder of Bankless, then draws parallels and differences between the Mt. Gox hacks and the FTX crash
- Mt. Gox was a technical error that led to a hack, and FTX was an outright fraud.
- The lasting impacts might be the same. The question is how regulators will react and how that might impede further innovation in crypto.
- After Mt. Gox, a lot of publicity was of the opinion that crypto as an industry was over. This time, there’s a lot less sentiment that something like the FTX crash can kill the whole industry.
- Self-custody is paramount in crypto. The “not your keys, not your coins” lesson from the Mt. Gox incidents has to be relearned by old and new adopters.
- FTX is a combination of Maddoff Ponzi and Theranos.
- Some people suffered from Mt.Gox and now lost money on FTX.
- FTX surrounded itself with trustworthy people, unquestionable support of the media, and big injections from prominent VC names; all of these made people think that their funds were safe.
- Crypto people have been working very hard in DC over the past few years to undo the damage of Mt. Gox, which is still not resolved entirely. So the negative impact of the FTX collapse will be there for many years.
- FTX case is not demonstrative of specific problems in crypto. It’s a scam orchestrated by people that could have done it in any industry.
- We should refrain from punishing the Crypto Community or blockchain technology and innovations because of one bad actor running a centralized Ponzi scheme.
Ryan Sean Adams, co-founder of Bankless
- Mt. Gox existed during the wild days of crypto and was a “joke of a custody solution” without security.
- On the other side, FTX had serious people in suits with connections to DC; celebrity endorsements; large, credible investors; run by a wunderkind featured in Fortune magazine.
- SBF did not come out of the OG generations of crypto. He was seen as someone who wanted to professionalize the industry, someone we could trust.
- Establishing this media image of SBF was part of the scam.
- SBF was asking DC for regulation against DeFi to get advantageous conditions to run it in the US while he was running a Ponzi scheme right under their noses. The same way Bernie Madoff did.
- This showed that if you donate enough money to the right people and align yourself with the right ideology, you can scam people without anyone noticing.
- For SBF, crypto was just a way to extract money, not bring progress to the industry and humanity. The red flags were there all along:
- FTX was able to create demand by offering lucrative products and services, which the more established players could not offer because of the level of scrutiny accumulated over the years of successful operation.
- This is a regulator's failure - they prevented good domestic businesses from offering these services, thus forcing the consumer to use unregulated offshore services that are fully accessible by US residents.
- At this turbulent time, the whole crypto community has to be united to address regulators and legislators so that their response to the FTX crash won’t destroy the community.
- Kraken was the first exchange to implement Proof of Reserves (PoR) in 2014. It allowed users to see the total holdings of crypto assets and total client liabilities. Users can check cryptographically if their balance was included in the latest audit.
- The audit is done at least two times a year. More frequent and unpredictable audits make it harder to use borrowed funds to show in the audit.
- PoR combined with Proof of Liabilities (PoL) makes it almost impossible for exchanges to hide irregularities.
- PoR and PoL are very effective against highly fractional exchanges and identify problems much earlier.
- Regulators don’t require implementing these safety measures, so Kraken voluntarily encourages other players to follow them in the pursuit of more safety in the centralized crypto space.
- The rankings websites should adopt a more reliable way to verify information and rank exchanges with the inclusion of PoR and PoL types of safety procedures.
- The crypto ecosystem is much more mature now - some projects lived through several bear markets and can survive a liquidity crunch. FTX going down does not mean there are not many options now, unlike how it was with Mt. Gox.
- The political damage that FTX caused will take some time to recover from. Keeping true to the values of crypto should be the focus of all crypto ecosystems:
- The freedom of money and financial services
- Separation of money and state
Watch the full interview here:
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