3 min

What does FTX, Binance, and Gemini have in common?

Posted on
January 18, 2023
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    The world has been trying to piece together the dramatic collapse of the infamous crypto exchange FTX and crypto trading desk Alameda Research. It is somewhat murky waters to comprehend the full impact of all parties involved (customers, investors, creditors, etc.) as well as the broader digital asset ecosystem. We are seeing the ripple effects of this calamity with new actions from the SEC against DCG and Gemini for the failure of their Earn products while also selling illegal securities to customers.

    Unfortunately, this is a painful lesson in risk management for users and organizations entrusting custodians that took advantage of them. This is unfortunate as 51% of adults globally admit they don’t know enough about crypto already and therefore likely lack confidence in alternative forms of custody (self-custody or non-custodial).

So with that context let’s answer the question. What does FTX have in common with Binance, Gemini, and any crypto exchange for that matter?

    Well if you pull on that thread, it becomes clear that they all share in this element of custodial risk. The centralized exchange business models seek to earn the trust of clients to hold their assets on their platforms and monetize with transaction fees. Under these terms of service, customers don’t actually hold the private keys of their coins, but really an IOU that the exchange issues to its customers. They do a great job making customer feel secure with a pretty dashboard to see their balance for something they don't actually own. Hence the saying by those initiated in the Bitcoin space “not your private keys, not your coins”.

    The reality is custodial risk is inherent in any centralized  exchange, tradfi bank, and financial institutions today (As shown by Mt. Gox, BlockFi, 2008 Financial crisis, etc.). History is littered with examples of this risk, making for one reason or another those assets a costly challenge to safeguarded properly.  As a result, it is important for the public to carefully evaluate the financial strength and reputation of a custodian before entrusting their assets to them. However, even in the modern world with proper disclosures and audits there is still no certainty that anyone is too big to fail as proven by the 2008 financial crisis.

  That is until, Bitcoin of course, which is why at Lucent Labs we advocate and build non-custodial solutions for clients to safely custody their Bitcoin private keys. Our mission is to empower our customers to realize the full spectrum of Bitcoin's unique monetary properties (decentralized, borderless payments, low fees, etc.). We don’t charge transaction fees and with our industry leading bitcoin operations (BitOps) framework we enable any size organization to operate with the highest standards, security, and safety. Start your Bitcoin journey with us and we’ll set you up for long term success in a Bitcoin economy. Schedule a BitOps consultation or sign up for the Bolt Node and Cache beta to get started on your journey towards a Bitcoin operation for your organization.

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