Why Coinbase Didn’t End Up Like FTX: Brian Armstrong

Coinbase CEO reiterates what makes his company’s business model less susceptible to bank-run events.

Coinbase CEO Brian Armstrong argued on Tuesday that his exchange is not vulnerable to this week’s FTX failure.

He said the “events” surrounding FTX appear to stem from risky business practices that Coinbase is not involved in.

Coinbase Business Model

Armstrong began by expressing his sympathies to everyone involved in the FTX situation – especially customers who could potentially lose money. Early Tuesday, FTX appeared to have stopped processing withdrawals for hours, and on-chain data suggests that’s still happening.

FTX and its CEO, Sam Bankman-Fried maintained on Twitter beforehand that the company’s assets were “fine,” and that its withdrawal queue was returning to more “reasonable levels.” However, the CEO confirmed the following day that FTX was caught in a “liquidity crunch” from overwhelming withdrawal requests, and needed Binance’s support to navigate it to protect customer funds.

“This event appears to have been the result of risky business practices, including conflicts of interest between deeply intertwined entities and misuse of client funds (lending),” explains Armstrong. user property)” explains Armstrong.

In contrast, the CEO said Coinbase does not touch customer funds once it has been deposited unless instructed to do so by the customer.

The exchange has this in previous statements, including after the fallout of Celsius, Voyager, and Three Arrows Capital. Each firm lended customers’ assets in order to generate yield with CeFi and DeFi institutions, but was caught in a contagious string of collapses following Terra’s collapse in May.

Just as Armstrong said at the time that Coinbase has no exposure to these companies, he clarified on Tuesday that they are not exposed to FTT, FTX or its sister company Alameda. FTT has crashed 73% in the last 24 hours – a token that Alameda reports has been exposed to a lot.

Coinbase has never issued a similar exchange token and has audited its public finances to ensure customers that their funds are safe.

The root of the problem

Armstrong believes that part of the problem stems from a lack of clear regulatory certainty in the United States, which has driven 95% of crypto trading to grow overseas. These foreign companies engage in “more dubious and risky business practices”.

We should continue to work with policymakers to create sound regulation of exchanges/custodians centralized per market (as we have been doing for a while), but then we need to see a level playing field enforced, which has not happened so far,” he said.

In the long run, Armstrong says that decentralized finance will help reduce the risks associated with trusted third parties, as all operations will be publicly audited on-chain.

Unfortunately, Defi is currently prone to attacks and exploits that cost users over $3 billion this year alone. Due to its anonymity, it can also be difficult to catch criminals when they steal funds from a certain smart contract.

To avoid similar problems with FTX, Binance CEO Changpeng Zhao said on Tuesday that his exchange will soon introduce a “Merkle-tree proof of Reserve” for the sake of “complete transparency.”

Read more: Nigeria’s presidential candidate Adewole Adebayo to create 30 million crypto jobs

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