Lessons from FTX Collapse and the Future of Capital Risk Management
One year since the FTX Collapse and Capital Risk Framework BGIN Block #11
Key Takeaways:
Japan's regulatory framework enabled the successful return of customer assets from FTX Japan.
Asset segregation and local regulatory compliance were crucial factors in protecting Japanese users.
Circle introduced a new risk-based capital framework for stablecoin issuers.
Bankruptcy segregation and global system risks emerged as key challenges
The incident highlighted the importance of business continuity planning in crypto firms
The JFSA Response
The session opened with insights from Japan's Financial Services Agency (JFSA) on how their regulatory framework, developed since 2016, helped protect local customers during the FTX collapse. As one JFSA representative explained:
"FTX Japan became the first FTX entity to allow users to withdraw crypto assets and cash, thanks to Japan's asset segregation requirements."
Key Protective Measures
Japan's regulatory framework included:
Mandatory registration for crypto asset service providers
Strict asset segregation requirements
95% cold wallet storage requirement
Regular external audits
Comprehensive KYC protocols
Lessons Learned
Three critical insights emerged from the FTX collapse:
Bankruptcy Segregation
Parent company bankruptcy laws can obstruct timely asset return
Local regulatory frameworks need independence
Global System Risks
Shared systems across entities can delay asset access
Need for operational independence in emergencies
User Understanding
Confusion about protection under different entities
Importance of clear communication about regulatory coverage
Circle's New Capital Framework
Circle presented a forward-looking approach to capital risk management with five main risk categories:
Financial risk
Concentration risk
Operational risk
Liquidity risk
Governance risk
The Issuer Balance Sheet Model
Key components include:
Asset side: Liquid reserves
Liability side: Customer obligations
Loss-absorbing capital
Dynamic risk assessment
Quarterly evaluations
As Circle's representative noted: "The reserve capital should be in cash or highly liquid assets, not in assets like Bitcoin or other tokenized assets."
Operational Resilience
The framework emphasizes:
Value-at-risk models for long-tail risk
Regular stress testing
Blockchain infrastructure risk assessment
Dynamic capital requirements
Regulatory Evolution
The incident has sparked regulatory changes:
Enhanced guidelines for crypto asset service providers
Stronger focus on business continuity planning
Improved asset segregation requirements
Cross-border cooperation frameworks
Looking Forward
Key recommendations for the industry:
Implement robust asset segregation
Maintain operational independence
Develop comprehensive business continuity plans
Ensure clear customer communication
Regular stress testing of systems and procedures
BGIN's Role
BGIN is working to:
Document lessons learned
Develop best practices
Create educational resources
Foster international cooperation
Join the Conversation
The industry needs continued dialogue and collaboration to prevent future crises. BGIN invites stakeholders to contribute to developing more robust frameworks for capital risk management in the crypto space.
This blog post is based on discussions from BGIN Block #11, Washington DC, October 21, 2024.
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