What this fintech scandal means for crypto
A couple of weeks ago I wrote a blog about where I see crypto heading and included a few predictions about what to expect in the future as the crypto environment matures. And then FTX, the world’s second largest crypto exchange, filed for bankruptcy amid rumors of lies, theft, hacks and negligence. So now what?
Several of Engiven’s friends, partners and clients have reached out over the past few days to check in. Indeed, this is a black swan event and I thought it appropriate to craft a response that attempts to sum up the current state of affairs, both from inside the crypto space, as well as where we stand as a company, and what this environment might mean to you, our esteemed partners.
Let's get right to it.
FTX was widely considered the second largest crypto exchange in the world, founded by Sam Bankman-Fried, known in pop culture by his initials: SBF. Through an online account (think eTrade for crypto), FTX users could buy and sell crypto, and custody crypto assets on the FTX exchange.
SBF also started Alameda Research, a small trading firm that was, in theory, designed to provide trading resources (intellectual capital) to FTX in an effort to ensure that FTX stayed ahead of the curve. In reality, we are now learning that Alameda Research was engaged in extremely high risk investing, arbitrage trading, lending and possibly even frontrunning tokens (buying tokens before they would be listed on the FTX exchange). To make matters worse, Alameda Research was apparently using FTX customer assets to fund these risky activities when the crypto markets turned south after the Terra Luna blow up. As a result of poor investment decisions and lack of internal controls, Alameda Research ran themselves out of liquidy. And, when word got out on the street that FTX may be insolvent, the FTT token (created by FTX) lost 80% of its value overnight. FTX depositors then pulled their assets off the FTX platform in droves. There’s obviously a lot more to the story, and more to come.
Both of SBF's aforementioned firms have filed for Chapter 11 bankruptcy, leaving many FTX users (now estimated to be more than one hundred thousand) unable to withdraw the funds that were being held on the exchange. Most hedge funds and investors who held funds at FTX have publicly stated that they will write off 100% of their holdings. It’s more than likely the funds are gone.
With regard to FTX and their FTT token, Engiven has zero exposure to FTX and has never offered the FTT token as an option for donating through our service. Both we and our exchange partner, Gemini, rigorously evaluate tokens prior to adding them to our list of accepted tokens.
What it means to Engiven and our customers
While it pains us to see people lose their investments, Engiven has no direct impact from the FTX crisis. Engiven’s service is vastly different from FTX and our crypto donation products were designed from inception to be inherently safe. Engiven maintains strict controls to ensure all customer assets are distinctly segregated, and we maintain strong controls and accurate records to ensure this is strictly enforced. Here’s how that works:
- The donor sends crypto to the public address we've provided. That address is directly associated to your nonprofit’s segregated account at Gemini.
- Once confirmed on the blockchain, your crypto assets are deposited into your Gemini account, a sale order is immediately placed and the crypto is exchanged for USD.
- The resulting USD proceeds are transferred directly from your Gemini account to your nonprofit's local bank account.
As a nonprofit client of Engiven, your account, your information and your funds are safe. Some of these recent events are troubling to be sure. However, our model was designed to remove risk and uncertainty so that we could help catalyze generosity.
Gemini, our exchange partner, sent out a communication to their partners saying, "For the avoidance of doubt, Gemini has no exposure to FTT tokens or Alameda and no material exposure to FTX." Gemini is a Full-Reserve Exchange and Custodian, meaning that all customer funds are held 1:1 and available for withdrawal at any time. We chose Gemini as our exchange partner in large part because of their regulatory oversight and compliance measures.
Additionally, Engiven was the first cryptocurrency donation platform to receive SOC 2 Type 1 compliance in accordance with American Institute of Certified Public Accountants (AICPA) standards for SOC for Service Organizations also known as SSAE 18. This refers to the quality of our site's security design, and speaks to our commitment to being industry leaders in financial transparency, reporting, and digital security.
You can read more about our commitment to security and compliance by clicking here: Security & Compliance
What it means for crypto
The FTX debacle is a big deal. In my opinion, it sets the crypto 'cause' back significantly. It negatively affects the momentum that was building around crypto education and the subsequent adoption trends. So said, we continue to believe that crypto is a winning technology. It has fundamentally changed the way participants can store and exchange value digitally, and it still has untapped potential in the peer-to-peer payment space. Furthermore, we've seen it unlock unprecedented amounts of generosity in new spaces, as many of our influential and impact nonprofit partners have received game-changing contributions over the past few years.
The negative effects of the FTX debacle are tough to overstate, and undoubtedly the full extent of the cascading damages will take additional time to fully assess. Our hope is that common sense regulatory clarity will emerge as an appropriate reaction, and that industry participants will begin to view compliance as a requirement for doing business rather than as a nuisance. Crypto is here to stay, and the projects and companies that provide responsible, innovative, useful, and safe products and services will be the eventual winners.
We pledge to be one such company.