Today the Financial Stability Board (FSB) published a report outlining the risks of multifunction crypto-asset intermediaries. Most exchanges combine functions that would otherwise be separated in traditional exchanges. In many ways, FTX was a textbook case for several scenarios. (The FTX emphasis is ours.)
FTX allowed unlimited leverage to Alameda. There was a liquidity mismatch – it needed to pay back FTX account holders in the short term but had committed some of their funds to venture investments. And it was very interconnected with the rest of the crypto ecosystem, bringing down Genesis and others when it collapsed.
The FSB notes that the combination of functions taken on by intermediaries is compounded by other factors also evident in FTX. It had weak controls, poor or no disclosures and massive conflicts of interest.
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