Does the Fall of FTX Break Trust in Our Industry?

It’s a tale as old as time: People hand over their trust to store their hard-earned money in financial institutions that promise to keep it safe. But, what happens when that trust is broken? Blockchain technology – the precursor to the ever-evolving decentralized finance (DeFi) movement – seems to be the lone ranger advocating for complete digital autonomy in a not-so-distant future. And, for good reason. Its promising features (i.e., enhanced security and a new level of reliable transparency that we haven’t quite seen before) are appealing to a general public who’s growing more concerned with how they navigate their finances.

But, can the future of currency really be all digital? Time will tell.

FTX – the cryptocurrency company that became one of the largest trading hubs in the world – filed for bankruptcy in November 2022, having been worth $32 billion at one point. Not long after, its founder was indicted on criminal charges, including fraud and conspiracy. The collapse has been so big, it’s shaken up an entire ecosystem of cryptocurrency that has now lead to the involvement of both Congress and the SEC.

FTX’s fall from (crypto) grace shows us what can go wrong when the premise upon which blockchain technology is built (i.e., unbreakable security) is challenged or wanders too far from its founding philosophy.

Could this be the beginning of a predestined destruction that forces us to change the way we incorporate new technology into our world for years to come?

What is blockchain technology?

In short, blockchain technology is an automated system that stores and manages data in a way that is both secure and transparent. Data is grouped together and stored into files that are called “blocks.” Each block gets sifted and organized amongst other blocks into a linear sequence that eventually creates a “chain” of data that can be referenced and accessed on demand without any chance of it being changed, manipulated, or tampered with once locked in.

This technology allows institutions to create hack-proof databases to handle transactions, assets, and interactions between different parties – ultimately relinquishing the need for costly security measures. It’s important to note that the blockchain term often gets conflated with the term ‘cryptocurrency.’ However, blockchain is the fundamental building block that provides the innovation behind cryptocurrency.

There are many who believe this new phenomenon will become an integral part of the way we do business in the financial world. But, it’s good to acknowledge that blockchain technology is still very much in its infancy. 

The recent fall of FTX begs the question: Just how safe is blockchain technology? It may now seem like the trust is broken. But what this could also mean is an opportunity to pay more attention to the regulations that are put in place that will make it safer for all. These events may likely inspire change – and add necessary pressure – that will influence regulators and government officials to hunker down on the legalities of blockchain technology.

Where’s the value for financial professionals?

LPL’s Research team has been studying blockchain technology’s investment potential over the past few years with the ultimate goal of opening up new avenues of value for financial professionals and their clients. The team believes that investors are looking for companies that can effectively integrate blockchain into their business models in order to reduce costs and maximize efficiency, creating room to improve both earnings and stock performance. As a result, the LPL Financial Research Blockchain Innovators Portfolio was created to give investors exposure to companies that are actively doing this.

The investment strategy is designed to work alongside an already diversified portfolio and supports an advisor’s ability to deepen client relationships. Financial professionals would do well to leverage their knowledge and awareness of blockchain technology to keep their clients informed about ways to enhance client experiences.

What needs to happen in the future?

In an ever-changing financial landscape, there’s one thing the DeFi movement currently lacks – the power of human perspective. Could much of the current margin of error be avoided with calculated procedures performed by humans who know what they’re doing? Though DeFi and blockchain technology could very well be the future, who’s to say we are really ready? Do individuals step in at their own risk?

At the very least, you may want to hold a healthy awareness around the topic, implementing efforts to remain wary and cautious about what’s going on in the cross-section where finance meets tech. Instead of waiting for regulators to create rules, active players in the industry could put some power in their hands and work strategically to enforce high standards by acting in good faith.

As far as the future is concerned, there are many changes happening so quickly that continue to blur the boundary between technology and finance even more. Financial professionals should try to stay knowledgeable about how these changes could help support their clients in new, innovative ways.

It’s likely that blockchain is here to stay. However, just how this fits into the financial market will be up to the humans who are already here.