“We’ve been set back a few years”

Crypto exchange FTX joined many other fallen projects — including Terra (LUNA), 3AC, Celsius and Voyager — in filing for bankruptcy in 2022. Owing to the devastation caused by multi-billion dollar losses suffered by businesses and investors, the man running the biggest crypto exchange, Binance CEO Changpeng “CZ” Zhao, envisions an era of greater regulatory scrutiny in the near future.

With one of the biggest crypto businesses falling overnight, CZ believed the episode was devastating for the industry, which took away a lot of consumer confidence. Speaking at Indonesia Fintech Summit 2022, he said:

“I think basically we’ve been set back a few years now. Regulators rightfully will scrutinize this industry much, much harder, which is probably a good thing, to be honest.”

Regulations in crypto historically circled around Know Your Customer (KYC) and Anti-Money Laundering (AML). However, CZ reiterated his long-standing belief that regulations must focus on exchange operations, such as business models and proof of reserves. As a result, he believed that tighter regulatory scrutiny around crypto business operations is around the corner.

While FTX’s collapse is bound to have a short-term impact on retail investors, in the longer term, this is a wake-up call for discussions about how to handle risks across crypto ecosystems. Speaking specifically about FTX, he said:

“The last three days is just a revelation of problems. The problems were there way longer. This problem wasn’t created in the last three days.”

CZ pointed out that the biggest red flag about FTX was Alameda Research’s financials, which were full of FTX Tokens (FTT) that made him finalize the decision to sell off Binance’s FTT holdings worth over $2 billion at the time.

The following day, FTX CEO Sam Bankman-Fried reached out to CZ with a deal that “did not make sense from a number of fronts”. At the same time, CZ hoped to get an over-the-counter (OTC) deal for protecting users:

“Original intention was let’s save the users, but then the news of misappropriating user funds, especially U.S Regulatory Agencies investigations (made us realize) we can’t touch that anymore.”

CZ believes that increasing transparency and educating regulatory agencies about crypto audits and cold wallet information will make the industry much healthier. Finding the right balance of rules is not ask, he said.

The entrepreneur highlighted the need for easy tools for saving private keys and other security functionalities but argued that the crypto ecosystem will grow in incremental steps and not giant leaps.

Related: Binance Proof-of-Reserve pledge gains support following FTX crisis

Taking a proactive approach in regaining investor confidence, Binance published a new page titled “Proof of Assets,” which displays details about the exchange’s on-chain activity for its hot and cold wallet addresses.

“Our objective is to allow users of our platform to be aware and make informed decisions that are aligned with their financial goals,” said Binance in an official statement.