What Happened to FIX: (and why government finance officers should care).

• Position: SPECIAL SECTION: WEB3 AND BLOCKCHAIN

FTX was one of the world's largest cryptocurrency exchanges. Such exchanges are the locations where users can trade crypto assets such as cryptocurrencies and crypto tokens, either for other crypto assets or fiat money. They form the financial backbone of the mainstream Web3 ecosystem.

FTX had a partner company, Alameda Research, which operated as a crypto hedge fund. Reports surfaced that Alameda's main holding was FTT, the native token issued by the FTX exchange. (1) Given these were meant to be two separate entities, the value of Alameda being propped up by a token created by FTX caused significant concern. In response, Binance, the world's largest crypto exchange, liquidated its holdings of the FTT token. What ensued was akin to a bank run--investors scrambled to withdraw their holdings, leaving FTX in a liquidity crunch, without the necessary funds to fulfill all the withdrawal requests. Binance briefly announced that it would buy out FTX to ease this liquidity crunch, but it pulled out after completing due diligence checks. FTX filed for bankruptcy soon after.

The implications of the collapse

Governmentfinance officials can learn a lot from the collapse of FTX, along with anyone who is interested in the future of Web3. Most apparently, the days of lax regulation that have characterized the Web3 boom appear to be coming to an end, and rightly so. Alameda was accused of using FTX customer deposits without consent to make highly risky investments, to an extent that its activities were described as "old-fashioned embezzlement." (2) The CEO brought in to oversee FTX's bankruptcy described it as suffering a "complete failure of corporate controls" to a degree that he had never before seen in his career. (3) Coming from the man who managed the fallout from the collapse of Enron, this statement speaks volumes. A litany of severe crises swept the Web3 ecosystem in 2022, (4) with huge numbers of everyday retail investors losing everything because of gross misconduct that often resulted in serious criminal allegations. (5)

Not only should this make any reasonable public official pause before considering engaging with Web3 projects in any capacity, but it also has implications for what is often the main attraction of the ecosystem. The so-called "regulatory arbitrage" opportunities of Web3 are the source of many of its purported speed, efficiency, and cost-saving benefits--and this window of opportunity appears to be closing.

Second, the collapse is a damning reality check to one of the most...