The practice of crypto firms using in-house tokens is coming under increased scrutiny, according to a recent article from the WSJ.
FTX used native crypto tokens called FTTs as part of its exchange. FTX companies used the tokens as collateral for loans, which became a problem when the value of the tokens collapsed, per the WSJ.
James Wester, Head of Cryptocurrency at Javelin Strategy & Research, elaborated on the this practice in a recent report, and noted that the company was essentially acting like the federal reserve, crafting its own “monetary policy” and printing its own “monopoly money” currency. Furthermore, the native tokens are not traded much. As a result, their value is not stable, so swings in price can be epic.
There are many other cryptocurrency platforms that have native tokens, but some of the most well-known ones include:
- Ethereum (ETH) – Ether is the native token of the Ethereum platform, which is used to pay for transactions on the network and as collateral for smart contract execution.
- Binance Coin (BNB) – BNB is the native token of the Binance platform, which is used to pay for trading fees, withdrawal fees, and other services on the Binance exchange.
The argument provided in favor of having native tokens is that they serve as a utility token for the platform and ecosystem. They also provide a way for users to invest in the success of the platform and potentially profit from its growth. Additionally, having a native token can help to incentivize participation in the ecosystem, as users may be more likely to hold and use the token if they have a stake in the success of the platform.
However, native control of these tokens has serious downsides. Because the trading platform essentially can print its own money, this can lead to corruption.
From the WSJ article:
“If somebody has their own proprietary token, by definition, they have insider information on the token, and then they are actively trading that token, that raises a lot of questions about insider trading,” said Austin Campbell, an adjunct professor at Columbia Business School.
Without using an in-house token, FTX would likely not have reached the size that it did, and it’s fallout may not have been as extreme.
The utopian vision of cryptocurrency revolves around the idea that finance has been crippled by regulation. But in this case, a little more regulation would have helped. While native tokens are not all bad, they can create incentives for bad behavior, which is why U.S. regulators are getting involved.