The loud collapse of crypto-exchanges: does Russia need such a tool?

This year, cryptocurrencies in general and bitcoin in particular will be 15 years old. Bitcoin and other cryptocurrencies are bought, sold, invested in and lose fortunes on. And if something is bought and sold, it means that from the point of view of a market economy, this is a useful and necessary thing. And since the mechanism of working with cryptocurrency and blockchain technology create new relationships between the seller and the buyer, it means that these relationships require regulation.

In Russia, the issue of legalization, regulation and use of cryptocurrencies useful for the economy has been studied and discussed for about 8 years. The first working group to study the possibilities of bitcoin and the blockchain technology underlying it was created by the Bank of Russia back in 2015. The law on the legalization of cryptocurrency mining, prepared by the State Duma Committee on Finance, was supposed to be adopted last year, but after numerous examinations, the document was sent for revision. It is expected that the revised version will be presented for the first reading in the Duma this month.

Probably, in connection with this fact, messages about discussions in the relevant parliamentary committees of the idea of ​​creating national cryptocurrency exchanges have reappeared in the information field. After all, if a cryptocurrency can be mined (produced using complex, energy-intensive calculations) in Russia, then a mechanism for its implementation is probably also needed. Therefore, the idea of ​​a national crypto exchange was already discussed in the context of the mining law last year. But the Central Bank opposed the idea.

Meanwhile, over the past year, international cryptocurrency exchanges that carry out legal transactions for the sale and purchase of cryptocurrencies for dollars, euros and other fiat money began to massively refuse to open accounts and conduct transactions for Russians, explaining this by sanctions. In particular, the world’s largest exchange, Binance, literally in March banned Russian residents from buying and selling crypto assets for dollars and euros, even through a direct sales service (without the participation of an intermediary).

The very fact of sanctions on free, decentralized assets may seem like a bitter irony. How can you ban the use of bitcoin if ownership and transactions in it are anonymous and there is no unified management of the blockchain system? The problem is that, at their core, cryptocurrencies are hardly a currency, despite being invented as such. You can pay with cryptocurrency, but surprisingly little for anything. In fact, to some extent, cryptocurrencies are used as money only when collecting donations and in illegal activities (purchase of prohibited substances, cyber fraud). Therefore, the average citizen who wants to take advantage of an anonymous decentralized system and does not have systems with sufficient mining power needs a mechanism to sell and buy crypto for ordinary money. In addition, it is obvious that mining equipment and electricity for it are sold for ordinary currency, therefore, here the question arises of exchanging mined bitcoin for dollars, euros, yuan. In other words, a mechanism is required to exchange crypto assets for ordinary ones and a way to set a fair exchange rate. The standard mechanism for meeting sellers with buyers and setting prices for assets under capitalism is the stock exchange. The mechanism is largely controversial and imperfect, allowing numerous manipulations on the part of both participants and organizers of transactions. That is why today stock exchanges all over the world have strict regulation. But this applies to conventional stock and commodity exchanges. The emergence of blockchain and cryptocurrencies turned out to be quite an unexpected phenomenon for regulators. At the same time, cryptocurrency exchanges quite existed for themselves, because if something is not directly prohibited, then there is the possibility of existence in the “gray zone”. It was during this turbulent time of complete deregulation that major fortunes were made, and from this time, amazing success stories of crypto investors come from.

By 2013, the price of bitcoin had risen to $1,300 (from $2 in 2011), and the asset became of interest to a wide range of private “quick money” enthusiasts. The first attempts to legalize activities related to crypto assets have appeared. One such attempt was the Japanese exchange Mt.Gox. By 2014, it was the largest crypto exchange in the world, with up to 70% of all bitcoin transactions going through it. But it became known to the general public for its collapse, which is associated with hackers who stole 850,000 bitcoins from the company’s wallets in an “incomprehensible way.” And although about 200 thousand bitcoins were eventually found and returned with the help of lawyers and the police, this dealt a mortal blow to the company, most of its customers were left with nothing.

The next “bubble” of cryptocurrencies inflated pretty quickly, by 2017 everyone was talking about them. The mechanism of ICO – the initial placement of tokens to finance start-ups and refinance mature businesses, dispersed the price of bitcoin to 20 thousand dollars. Alas, the bubble burst very quickly, most ICOs turned out to be outright scams and pyramid schemes.

The collapse of the Canadian exchange Quadriga in 2019 against the general background of crypto-exchange bankruptcies does not look the biggest – about $ 200 million and 115 thousand customers. But it is interesting because the owner of the company, Gerald Cotten, died suddenly, while no one except him knew the passwords for accessing user accounts. The investigation that followed the collapse showed that the entire management of the exchange was carried out by one person from a home computer and the owner did not distinguish between his own funds and those of clients, calmly spending client money on his whims. Currently, the clients of the exchange are seeking the exhumation of the corpse of the owner of the exchange, suspecting that he did not die, but faked death by escaping with their money.

In 2020, the Exchange Graveyard website counted 94 closed exchanges in a year. The biggest loss of the year – Singapore’s FTCoin exchange – took $130 million of customers to the grave. At the same time, 41 exchanges of this number “simply disappeared”, another 7 turned out to be fraudulent enterprises, 6 lost all their money during a hack, three were closed by regulators, the rest were closed for “business reasons” (misappropriation of clients’ money and dubious offshore transactions). A comparable number is about 90 exchanges closed in 2021. And finally, last year, 2022, was marked by several of the largest stock market crashes in the history of crypto.

Regarding the “loud” collapse of the FTX exchange, despite the fact that the trials of the company’s management have not even begun, books have already been written and films are being made. Still – the company left a hole in the financial system of $ 9 billion. At the time of the crash, FTX had an impeccable reputation, over a million customers, and was the second largest in the world in terms of trading volume. The company offered not only a cryptocurrency exchange, but also crypto deposits at a tempting 8 percent. What could go wrong? The problem was that the owner of FTX, MIT alumnus Sam Bankman-Fried, had come up with an “infinite money” scheme that was as effective as pulling yourself out of a swamp by your hair. True, for some time this scheme worked (in the absence of transparency and regulation), for which FTX was reasonably registered offshore. The essence of the scheme is that in addition to trading in classic cryptocurrencies – bitcoin and ethereum, FTX issued its own token. The bulk of the tokens went to lending to another Bankman-Fried company, Alameda Research, which borrowed other assets secured by issued tokens, which were invested again in FTX, raising the price of tokens. The scheme worked until it became known. And when this happened, the largest holders of FTX tokens began to throw them off at any price, crashing the exchange. Suddenly, at the same time, there was a hacker attack (a lot of things can be attributed to hackers!), which claimed about 650 million dollars.

In general, the short but bright history of crypto exchanges is a path from collapse to collapse. Probably, one can object to me that there are also successful crypto-exchanges that have existed for many years and have proven their reliability and viability. Alas, the collapse of FTX has greatly changed the context for the existence of crypto assets. Bankruptcies of this size are already beginning to affect the entire economy, so the regulation of the once free and wild cryptocurrency market is tightening. Regulators also have questions about the largest and most successful crypto exchange in the world market, which controls about 60% of crypto trading, Binance. In the United States, the Securities Trading Commission and the Futures Trading Commission have opened cases against her. In addition, regulators have banned a number of US purchases by Binance and trading in the dollar-pegged Binance USD token. Perhaps that is why Binance, as well as other major exchanges operating in the US, are forced to comply with the requirements of sanctions against Russia.

And here the question arises: what is the value of creating a legal Russian exchange in this case? The factors that made the cryptocurrency market attractive to investors – anonymity and decentralization – are being lost. Yes, domestic miners will be able to sell their tokens in the Russian Federation for rubles, and Russian citizens will be able to buy bitcoin and ethereum for rubles, but for what? Physical assets from countries that have imposed sanctions cannot be bought, as exports are controlled. And purchases in countries that have not imposed sanctions are already possible without cryptocurrency. So is there any point in the Russian cryptocurrency exchange? However, this question is rather rhetorical. Without the permission of the Central Bank, no exchange will take place. Until now, the Central Bank of the Russian Federation has been resolutely opposed to the stock exchange, and the position of the Bank of Russia has hardly changed due to new discussions in the Duma.