Crypto must avoid FTX 2.0 in the next bull run

Opinion by: Debra Nita, associate director and head of growth at YAP Global

FTX’s collapse is a stain in crypto’s history, reminding us of the dangers of unchecked ambition and lack of accountability and governance controls. The company’s downfall catalyzed a loss of over $200 billion in the industry’s market capitalization. It also shattered public trust, painting crypto as fraudulent rather than transformative. 

It was not crypto’s first rodeo. Similar patterns emerged in the Mt. Gox breach of 2014 and the 2017–2018 initial coin offering (ICO) craze. The industry has seen entities gain market share and influence in an environment that lacked oversight. 

Some elements remain outside the control of participants in the space. From 2017 to 2018, many projects operated in good faith but lacked guidelines. When the United States Securities and Exchange Commission issued its report on The DAO, which notified the entire ICO market and catalyzed the crash, it implicated all ICOs regardless of quality. Despite that, there are clear actions players can take to influence the future of the industry.

Robust governance and transparency should be expected 

Many expect more explicit US regulations and SEC reform starting in 2025, in addition to regulations in Europe and Asia already being implemented. These frameworks will take time to roll out and will have a noticeable effect on the space. 

In the meantime, industry participants need to establish better standards to uphold accountability and transparency. Robust governance structures and transparent reporting should become an expectation before investors and partners choose to do business with other projects in crypto. 

It can be tricky because of crypto’s inherent ethos of decentralization — but decentralization should not mean abandoning accountability. Practices like regular financial reporting in traditional finance (TradFi), such as public disclosures and annual reports, should become the norm. Coinbase began publishing transparency reports in 2020, continuing to do so after its initial public offering in 2021. Kraken began publishing proof-of-reserve audits in 2014. Blockchains like Solana, Optimism, Avalanche and Manta Network regularly report quarterly performance, leveraging research firms like Messari. 

Professionalizing the space by hiring executives from TradFi who bring relevant expertise and practices would also expedite this process. 

Glorification of “main characters” needs to be curtailed

FTX’s collapse can largely be attributed to the over-centralization of power in one individual, Sam Bankman-Fried. When FTX fell, the whole industry suffered.

That is not uniquely a problem in crypto. A paper published in the Berkeley Business Law Journal titled “Limiting the Power of Superstar CEOs” expanded on how celebrity CEOs pose risks to the integrity of corporate governance. We also saw this in the rise and fall of Elizabeth Holmes of Theranos and Adam Neumann of WeWork. While setting practical limits on the control of a company’s operations is a nuanced discussion on its own, it happens downstream of the glorification of the individual. 

Recent: Crypto criminals who are spending their first New Year’s in prison

Crypto continues to show that it is prone to “main character syndrome,” given certain founders’ or influencers’ sway. Ethereum founder Vitalik Buterin continues to play a highly influential role in its future despite being one of the many key contributors to the blockchain. The words of trader Ansem have been seen to move markets, while Helius founder Mert Mumtaz has risen in prominence as Solana’s most popular proponent. 

Charismatic, innovative leaders will always play an important role in charting a vision for industries and inspiring large groups of people to invest time and resources toward those goals. Crypto projects also need to survive and sustain themselves beyond individual founders. They need to future-proof themselves by distributing decision-making and responsibility across organizations.

In a highly sentiment-driven industry, promoting accountability of leaders and distributing responsibilities will help temper the tendency to over-rely on specific individuals for the success of a project or space.

The era of unchecked celebrity endorsements needs to be behind us

FTX’s (and other projects’) overreliance on celebrity and key opinion leader (KOL) promotions created the illusion of legitimacy but ultimately inflated its downfall. 

Celebrities like Tom Brady and Gisele Bundchen were paid $30 million and $18 million, respectively — though mainly in FTX stock — to promote the brand. Other paid brand ambassadors included Stephen Curry, Shaquille O’Neal, Kevin O’Leary and Naomi Osaka.

While there is a place for leveraging the influence of popular individuals in advertising brands, when it comes to a highly volatile space, more care needs to be taken to keep marketing practices in check. The signal of maturity would demonstrate a shift of reliance on credible, knowledgeable opinion leaders to create awareness rather than incentivized celebrities. While it is tempting to splurge marketing dollars to generate the quickest result, marketing leaders and users should view celebrity and KOL endorsements with a critical lens. 

The stakes are high. Another crisis could be devastating if proper practices and standards are not remembered and implemented. 

The coming market cycle will broaden the industry’s scope of influence to new audiences and with new use cases. With that will come the magnification of the potential benefits it can create and the possible vulnerabilities. Therefore, the critical lessons from the FTX era should be seriously reflected upon to guide the industry as it enters a new era of growth.

Opinion by: Debra Nita, associate director and head of growth at YAP Global.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.