The flow article ’Crypto assets: a lesson from history’, discusses what was learned from the FTX crypto currency exchange and hedge fund’s demise – as well as that of the more recent collapse of cryptocurrency lender Genesis. The piece concludes that these events have “led to calls for more regulations from all quarters, across the world, to better police the crypto industry and to protect investors’ assets”.

This declaration sums up and mixes several areas of concern including asset segregation, transparency, bankruptcy-creditor-investor rights to crypto assets, and balance sheet strength. The voice also reflects views of regulatory arbitrage that were exposed by FTX, for example between domiciliation and place of business, and integrated business models and how should activities be effectively regulated, such as licensed cryptoexchange as a venue and cryptoexchange involved in its own trades.

The aftermath of FTX and other crypto firm collapses also raise questions related to legal protection for investors including clawbacks, legal rights to crypto assets, how should a bankruptcy stay work for crypto firms (since unauthorised crypto assets movements have proven possible even where a firm is under bankruptcy administration), and who should have the mandate to investigate alleged hackings during such times in order recover investors assets.

Poor governance was a recognised driver of FTX investors’ losses, and sharper observations in the industry have also differentiated areas to be regulated versus those better addressed by organisational ethos – for example, the standard of due diligence amid “Fear of Missing Out” (FOMO) and hubris.

So, in the fallout from FTX, the crypto space slowly progresses towards becoming safer for participants. The transition has started from the immediate relatively easy call for more regulation, moving to a more difficult stage to identify which areas should regulations address first – or would it be a global ‘Big Bang’ – and what would appropriate and proportionate rules for the cryptoasset industry look like? Importantly, regulations need to find a balance between growth and costs, as the industry is a creator of employment and jobs even in the traditional banking space.

The crypto asset industry is new, has an exciting future, and is also moved by similar human nature that transcends asset classes to create “Repeat” events in the crypto industry that have semblances with the traditional world occurrences. Ultimately, regulation cannot effectively manage human integrity, but rules can and should effectively deter intentional fraud. Hence, with a further crisis within the realm of future possibilities, investors and assets should at least be better protected from dishonesty as a result of today’s balanced responses to FTX and other failures.

Boon-Hiong Chan is Head of Market Advocacy Asia Securities & Technology, Deutsche Bank