Crypto’s Journey Beyond FTX: The Need for 24/7 Risk Management and a Transparent, Resilient Market
The cryptocurrency landscape has undergone significant changes since the dramatic collapse of Sam Bankman-Fried’s FTX in 2023, which wiped out billions in investor wealth. Despite the considerable strides made in technology and market maturity, the crypto ecosystem still faces ongoing challenges in terms of risk management and investor confidence.
As traditional financial (TradFi) experts continue to step into the space, the industry is becoming increasingly aware that improvements in risk management, particularly 24/7 oversight of counterparty, market, and credit risks, are necessary to create a bulletproof ecosystem.
At the “Views From Wall Street to Crypto” event held at Consensus Hong Kong on February 19, 2025, these challenges and opportunities were discussed by key figures from both the traditional finance world and the crypto space, underscoring the importance of risk mitigation in sustaining long-term growth.
The Evolution of Crypto Since FTX
The crypto industry has undoubtedly evolved since the spectacular downfall of FTX. In the wake of the collapse, investors and market participants witnessed firsthand how vulnerabilities in the ecosystem can wreak havoc on both confidence and capital. However, according to Gautam Sharma, CEO and CIO of Brevan Howard, there have been notable advancements in crypto technology over the past 18 months.
Sharma noted, “You have traditional players who have come into the space now, especially for us, most of our trading happens off exchange settlement, where you actually keep your assets on custodians while you are able to trade on exchanges.”
The technology may have advanced, but there remains a critical need for robust risk management structures. While the infrastructure has improved, crypto still lags behind traditional finance in the consistency of risk oversight.
The Importance of 24/7 Risk Management
Crypto operates in a 24/7 environment, and the need for continuous monitoring of market, counterparty, and credit risks is essential to safeguard investments. In a market that never sleeps, traditional finance principles must be adapted to crypto’s unique dynamics.
Counterparty Risk: A Growing Concern
One of the most pressing concerns in the crypto space is counterparty risk — the risk that one party in a transaction may fail to fulfill its obligations. This is especially risky in crypto, given the absence of traditional intermediaries like banks or clearinghouses. Counterparty failure can lead to immediate and significant losses, which is a challenge both for directional traders and non-directional arbitrageurs.
Fabio Frontini, founder of Abraxas Capital Management, highlighted this issue by emphasizing the importance of counterparty risk in arbitrage trading. “When we do arbitrage, the counterparty risk is the most important one,” Frontini said. Credit risk also remains a critical factor, with participants needing to assess the financial strength and reliability of counterparties at all times.
Stress Testing: A Vital Tool for Risk Mitigation
Frontini also stressed the importance of regular stress testing. In traditional markets, a stop-out could lead to a margin loss, but the same scenario in the crypto market may be exacerbated by factors unique to the space. Stress testing and scenario simulations, particularly in volatile markets like the perpetual futures market, can help participants better understand how assets may perform under extreme conditions. “It [stress testing] can be very rewarding when done properly,” Frontini added.
This kind of foresight allows market participants to adjust their strategies proactively rather than reactively, making it easier to navigate through potential market turmoil.
Innovating for Transparency and Trust
One of the key takeaways from the panel was the growing need for greater transparency and innovation in the crypto ecosystem. Mike Kuehnel, CEO of Flow Traders, emphasized that for crypto to truly evolve and gain the confidence of institutional investors, there needs to be a transparent and consistent approach to innovation.
“Getting the best price and giving you the possibility to transact whenever you want to is a key ingredient,” Kuehnel explained. This sentiment highlights the importance of clear communication about market conditions and liquidity availability, especially in a decentralized environment. Ensuring that data is transparent and available in real-time is a major step forward in building trust and attracting a broader base of investors.
The crypto market must also address fragmentation. While liquidity has improved for major cryptocurrencies, it still remains fragmented across various decentralized finance (DeFi) platforms, blockchains, and networks. Fragmentation can undermine the stability of liquidity, especially when large orders are placed on exchanges that cannot absorb the full volume without causing significant price movements.
Addressing Liquidity Concerns in a Fragmented Market
Liquidity — the ability of an asset to be quickly bought or sold at a stable price — has been a major issue in the crypto space. The liquidity crisis became evident following the collapse of FTX and its sister company, Alameda Research, which had significant influence over the market. Although liquidity in major coins has improved since then, concerns about the fragmentation of liquidity across various platforms remain.
The presence of multiple DeFi platforms and blockchains, while creating opportunities for innovation, also leads to a dispersion of liquidity that may hinder efficient market-making.
Market-making firms like Flow Traders are increasingly aware of these issues and are taking steps to create more unified platforms to ensure liquidity is available when needed. Kuehnel and other industry experts suggest that solving liquidity fragmentation will require collaboration between exchanges, DeFi platforms, and custodians to ensure data and liquidity flows without disruption.
The Road Ahead for Crypto
While the crypto industry has made considerable strides since the FTX collapse, there is still much work to be done. The market needs robust risk management frameworks in place to handle the unique challenges posed by 24/7 operations, counterparty risk, and liquidity fragmentation.
Innovations in the space must be accompanied by transparent practices and clearer communication, ensuring that both retail and institutional investors feel confident in the market’s stability and security.
Crypto’s future will depend on how well the industry can balance innovation with risk management, and how effectively it can adapt to the evolving needs of a decentralized yet interconnected financial ecosystem.
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