Indian crypto exchanges explore open source solutions after FTX fiasco

After the collapse of the FTX exchange, the third largest crypto exchange in the world, centralised crypto exchanges in India are looking to find ways to be transparent about their assets and liabilities in a bid to retain their users.

They are now in early stages of discussion exploring an open-source solution for tracking assets and liabilities on the exchanges.

“The Big 4 don’t audit cryptos. Also as it’s a closed ecosystem for the exchanges, it is difficult to verify that. We are trying to figure out a protocol wherein we can cryptographically proof the customer assets and liabilities rather than trusting an auditor who too have different sorts of issues," Gaurav Dahake, Founder and CEO, Bitbns said at Moneycontrol’s Twitter Spaces session.

Dahake said that the industry needs to ensure that they have a technology that can anonymously create the on-chain (on blockchain) product assessing the total assets and liabilities of exchanges.

“We’ll probably work with a few people and create an open source solution. If there’s a common open source protocol that can be plugged in and we could get assets on one side and liabilities on the other side, it would be great. But it would be very hard for someone accurately pinpoint which is the asset and which is the liability. A possible protocol defining these aspects is also needed,” he said.

The industry players are currently figuring a way out to arrive at a consensus on taking the industry forward and ensure bad actors are waded out and exchanges can be verified.

“Frankly being transparent should not be tough. But how do you know that the numbers reported are accurate. That’s where we are all stuck. The discussion moved from Poof of reserve to proof of liability and then move on to a third party auditor. This is a solved problem which needs a third party trusted entity to look into it,” Vikram Subburaj, Co-founder of Giottus, said.

The concept of Proof of Reserve is the idea of exchanges holding the cryptocurrencies create public facing attestations of their reserves, equating it with the proof of user balances or liabilities. Proof of reserves and liabilities together add up to show of Proof of Solvency which shows the financial stability of the exchange.

Mridul Gupta, COO of CoinDCX believes regulations alone won’t be enough to bring transparency to the system. A balance of regulations and best industry practices is the key, in his view.

“What crypto gives us most importantly is technology. So if you see, the FTX issue came into the limelight because of the decantralised nature of crypto, because deposits and withdrawals could be tracked. While we are far away from a point where everything becomes decentralised, we have to continuously work towards that,” he said.

“If you really keep building various protocols, use cases, and they can be truly decentralised on the blockchain, not only the governance would be better but it would be far more difficult for anyone to manipulate the ecosystem.”

Rethinking crypto

Not just the newbie retail investors but the entrepreneurs building the ecosystem didn’t see this downfall coming. FTX exchange was the third largest cryptocurreny exchange until last week, founded by Sam Bankman-Fried who had to ultimately resign and file for bankruptcy on Friday. The exchange and its trading arm Alameda Research were accused of fraudulent activities and enlisting their own FTT tokens as assets. Bankman-Fried himself was the trusted face representing the industry to the US policymakers.

Kashif Raza, Co-founder, Crypto Kanoon said, “This is the Lehman brother’s moment for crypto. Personally I thought 2022 would be the year of great adoption for crypto with the right retail investors coming in. This incident took the industry back by a few years.”

“VCs investing in Web 3 too now will limit their exposure and funding will take a hit. Investors will realise a lot of the things in Web 3 too are mere promises, not everything will survive. This was much bigger than a ponzy scheme, the industry has been made to look like a joke. Somebody has been toying with the system,” he added.

Vimal Sagar Tiwari, Co-founder and COO, CoinSwitch said,“The FTX bankruptcy and the story about mishandling of customer funds has caused turmoil to the crypto market. Situations like as these will compel investors to look at the functioning of the industry in a very different light.”

He added that investors must assess the background of the crypto platform and its founders before investing. They should look at what kind of practices they have followed. Most importantly, investors should always diversify their portfolio.