Unexpectedly, and to a great extent, the media circus that accompanied the collapse of FTX caused unforeseen disruption.

In actuality, though, it hastened the recognition that centralised exchanges, or CEXs, are flawed. Our industry will be affected for a very long time by how we pick up the pieces. Regulators are not in charge of stopping another FTX crash.

This new monetary system will keep making the same mistakes it has in the past until significant changes are made. We need to demonstrate to the globe that complaint decentralisation is feasible through our business and our developing technologies.

The first step is compliance.

The FTX case serves as a warning about the dangers of ignoring business compliance. An important lesson from the FTX case is the necessity for increased compliance.

We must perform better of monitoring the funds. Given that the problematic exchange lost close to $9 billion in customer assets, it is obvious that CEXs need to be constructed on a strong foundation. For the sector to grow, this will provide a foundation of security and confidence.

Compliance and transparency need to be given top priority in the post-FTX era. The FTX case, which addresses cash controls, HR procedures, approval processes, financial reporting, and internal and external audits, highlights the necessity of corporate governance. But more regulation is only a good place to start.

Regulation on its alone is insufficient.

Regulated exchanges promptly started advertising their regulated custodial services in the wake of FTX's failure. To guarantee that money are only spent as authorised, licenced CEXs in the US are required to keep customer funds separate from their own by their users.

Regulators have also been increasingly keen on enforcing new rules, yet this doesn’t eliminate significant risks.

Traditional finance—despite its strict regulations aiming to prevent centralized failures—has seen repeated instances of risk mismanagement. The collapses of Bear Stearns, Lehman Brothers, and, most recently, Credit Suisse have also spelled the dangers of relying too much on human intervention.

Regulation alone is not enough. Bad actors can still wreak havoc when they literally control the purse.

Self-custody is the key

So, the other big lesson is self-custody. It is talked about a lot in the industry, but what this means in practice is often disputed.

The Bitcoin whitepaper still stands as a reminder of the basics: if you entrust exchanges and other third parties with your private keys, you relinquish control over your money.

Once billed as a reputable exchange, FTX was considered a well-run, safe destination for crypto transactions. More than that, FTX was something of an industry darling. Yet, the reality was starkly different.

A secret backdoor had been established that allowed Alameda Research, the trading firm linked to FTX’s downfall, to withdraw billions of customer funds. While beneficial in bullish markets, Alameda’s excessive leverage significantly magnified losses during downturns. When confronted with margin calls during the crisis, selling off collateral risked substantial value depreciation.

Part of the trauma caused to investors was the swift and unexpected collapse of the world’s second-largest exchange.

The industry darling’s fortunes had seen a swift reversal practically overnight. In truth, optics and public perception coupled with FTX’s ludicrous marketing spending meant that the whole world took notice.

Sadly, these same public optics led customers to mistakenly assume their funds would be shielded from speculative activities like those practiced by Alameda Research.

In reality, following FTX’s bankruptcy, the U.S. Securities and Exchange Commission (SEC) described FTX as providing Alameda Research a “virtually unlimited line of credit,” creating a multibillion-dollar deficit for retail investors in FTX.

The lesson learned was as shocking as it was damaging. Storing cryptocurrencies in any and every centralized exchange is hazardous.

This was evidenced by the number of platforms suddenly halting withdrawals with little warning due to fears of a bank run, where everyone runs to a bank to withdraw their funds at once, and the bank, or in this case, centralized exchange, cannot meet the withdrawal demand.

That’s why self-custody matters. Keeping assets under your control is the sole means of mitigating loss risks. However, in the event of a crypto exchange failure, retail investors should not be fine with accepting only a small portion of their assets years later.

They deserve immediate access to 100% of their crypto at all times. Yet, while regulation and compliance are still valuable safeguards for an exchange, newer models are emerging that marry traditional legal funds management controls with self-custody.

Shifting the paradigm with hybrid models

No amount of regulation will make a financial platform completely immune to failure.

Even within regulated exchanges, users give up control of their assets to third parties for safekeeping. However, the means for a paradigm shift already exists. What if there was a way for CEXs to offer 100% self-custodial solutions?

In recent years, hybrid exchanges have emerged as an answer. Blending the best of CEXs and decentralized exchanges (DEXs) will enable innovation and strengthen asset security.

Users can trade directly on-chain without intermediaries. At the same time, traditional institutions can access decentralized finance features while benefiting from CEX security and liquidity.

More importantly, the hybrid model, with its trustless risk management and self-custody, addresses concerns by relying on code rather than human intervention to manage risk effectively.

Hybrid exchanges blend regulatory compliance with decentralized features, allowing users to engage directly with cryptocurrencies in secure wallets via smart contracts. Users also maintain direct control over their funds, bypassing custodians. All these take place within accessible, user-friendly interfaces akin to CEXs.

The result is an advanced trading system that mitigates the traditional weaknesses of both CEXs and DEXs, positioning hybrid crypto exchanges as potential game-changers.

A wake-up call for crypto

As the FTX trial continues to garner attention, it’s worth noting that industries commonly experience such upheavals. Wall Street itself has weathered scandals and challenges similar to those in the crypto space. Think of the Enron Scandal and Bernie Madoff Ponzi Scheme of the early2000s.

Still, as crypto industry custodians, we must not dismiss this case as a mere glitch. Such scandals tarnish the industry’s reputation, setting us back each time.

The crypto industry is still evolving and maturing over time, but there are increasingly better ways forward.

A warning to the crypto world

While the FTX trial continues to receive attention, it's important to remember that these kinds of disruptions are typical for industries. Wall Street has seen its share of scandals and difficulties, just like the cryptocurrency industry. Consider the Enron scandal and the early 2000s Bernie Madoff Ponzi scheme.

Nonetheless, we cannot write off this instance as a simple error as guardians of the cryptocurrency sector. Such controversies damage the industry's image and cause us to regress over time.

Although the cryptocurrency market is still developing and maturing, there are more and more advantageous options available.