FTX disaster: Why there is an urgent need for fully regulated trading venues

The bankruptcy of the crypto exchange FTX is causing horror in the market, as investors are threatened with billions in losses. Does this mean a setback for the crypto ecosystem with its promise of decentralising the financial sector? Max J. Heinzle, CEO of FinTech 21finance, develops modern distribution platforms for digital financial products with his team. In this current commentary, he underlines the importance of fully regulated service providers and trading venues, which in his opinion deserve the unrestricted trust of all market participants.

A shock wave is hitting the crypto scene: It recently became known that the hedge fund Alameda Research held more than a third of its assets in FTT, the crypto exchange FTX’s in-house cryptocurrency. Although FTX and Alameda were owned by entrepreneur Sam Bankman-Fried, they officially had nothing to do with each other. In light of these revelations, Binance, the world’s largest crypto exchange, decided to sell its remaining holdings in FTT. This spooked investors and investors and subsequently triggered a bank run on FTX. A few days later, FTX had stopped withdrawals on its platform, but the price of the FTT token had already fallen by more than 85 percent since the revelations. The takeover of FTX, initially announced by competitor Binance, also collapsed as a result. Thousands of investors are likely to have lost their savings as a result; they can neither access their crypto assets nor FIAT deposits. After failing to raise capital, over 130 companies associated with FTX and Alameda Research filed for bankruptcy.

No key, no asset

What lessons can be learned from this? Besides a good pinch of scepticism, there are several rules that investors should take to heart. Those who own cryptos or other digital assets (tokens) should not hold their crypto assets on crypto exchanges, if possible, in order to limit the risk of loss in the event of fraud or insolvency. Instead, investors have the option of holding crypto assets on their own wallet. In this way, they also retain control over the crypto assets by keeping the private keys themselves. With private storage, access is guaranteed at all times, except for the risk of losing the key. Alternatively, it is possible to hold larger crypto stocks with regulated crypto custodians. These work with segregated wallets per investor, guaranteeing sole access by the investor.

Regulated custodians are indispensable

The crypto assets traded on the digital distribution platforms developed by 21finance are held in trust on behalf of the user with our German regulated custodian partner Tangany. This ensures that the crypto assets belong to the users and no one else. Neither we nor Tangany can and may dispose of the cryptos and divert them from the closed circuit of the platform without the express instruction of the owner. In the event of insolvency, neither FIAT/Euro nor crypto assets would be affected, as these are managed as special assets and are therefore not part of the insolvency estate.

Security tokens exclude the risk of loss

In addition, most Security Tokens as digital, transferable assets distributed via our white-label platforms have so-called “burn and re-issue” functionalities. Security tokens have this built in as logic in the smart contract. On a regulated platform, customers are uniquely identified and investors and their token or crypto holdings are recorded in a register. These ensure that the tokens can be recovered after a loss.

The EU pilot regime, whose application phase will start as early as March 2023, will enable fully regulated DLT Trading and Settlement Systems (DLT-TSS) for the transparent and secure trading of classic and digital financial products as well as their safekeeping in the future. The DLT-TSS combines the activities of a trading system (DLT-MTF) with those of a settlement system (DLT-SS). There are already positive examples of regulation of the crypto industry at both European and national level: The EU Regulation on Markets in Crypto Assets (“MiCA”), which is just coming into force, and the DLT pilot regime are intended to create harmonised regulation for crypto assets and the operation of regulated trading venues across Europe. Luxembourg, Germany and Switzerland are also seen as positive, forward-looking role models.


About 21finance AG

with its innovative, decentralised Software as a Service (SaaS) solution, offers banks, financial intermediaries as well as companies outside the financial sector the opportunity to maintain digital marketplaces for the distribution of financial products. Through their own marketplace, operators can issue, distribute and make available for trading in the secondary market financial instruments such as shares, bonds, investment funds or even security tokens and cryptocurrencies in compliance with the law. Through the SaaS offering of 21finance AG, many other services along the value chain, such as the opening of a wallet, can be flexibly included. Investors can thus be offered a fully digital and regulated investment experience. If desired, issuers can place financial instruments on other marketplaces within the 21finance network. In this way, reach and product diversity can be significantly increased.

Based on the EU’s DLT pilot regime, the software developer for digital sales platforms is currently entering the application and approval process for a DLT-based trading and settlement system (DLT-TSS). With this step, the full potential of DLT financial instruments can be unleashed through an efficient and regulatory-compliant secondary market. With 21finance AG, the respective marketplace operators also benefit from a time- and cost-efficient entry into digital distribution – and into a digital financial world.

More: www.21.finance/en



Birgit Haisch

Yield Communications GmbH

E: b.haisch@yieldpr.de

M: +49 171 452 73 96



Timo Reitmaier

Senior Marketing Manager

21.finance AG

E: t.reitmaier@21.finance

M: +49 170 9660309