FTX Collapse: An Identity Crisis at the Root

The collapse of FTX Trading exchange in November 2022 shook the cryptocurrency market down to its core, triggering a wave of panic in investors, the media, political leaders, and the public. However, the turmoil and chaos surrounding the crypto industry are not a referendum on its value to society, nor on the blockchain technology underlying it. The root cause of the affliction affecting crypto is an identity problem, exposing the built-in security flaws of the digital wallets holding individuals’ crypto assets.

## The Built-In Security Flaws of Digital Wallets

Clients at FTX lacked the encryption keys to their digital wallets, which was held by FTX—the central authority. With no regulators in place to oversee transactions and interactions, things spiraled out of control and resulted in digital assets being compromised. A digital wallet with crypto allows a person to buy and exchange nonfungible tokens (NFTs) and other digital assets, and even use physical objects in the virtual world, and vice versa. While blockchain moved the administration of digital assets away from a central authority, the digital wallet, acting as a vault to those assets, has generally remained under the control of the central authority.

## Self-Sovereign Identity Solution

Enter self-sovereign identity (SSI), which gives users control over their digital identity and everything that comes with it, including digital currency, virtual objects, NFTs, and more. SSI is critical for building out a virtual world that matches trust that already exists in the physical world. A secure digital wallet offers a high level of security, augmenting the value of Web3, the metaverse, and other decentralized token-based innovations.

## Identity Recognition as Prerequisite to Building Trust

Arriving at this higher plane requires recognition that before anyone can trust anything, it’s critical to prove a person’s identity. Unfortunately, passreplaces are weak and easily compromised, multifactor authentication is clumsy and far from foolproof, and third-party authenticators are a pain to use. The adoption of SSI makes it possible to bake security into cryptocurrency and a Web3 world, by fully vetting and verifying an individual using a paired public-private key to bind their identity and verified credential documents.

## Blockchain-based Distributed Ledger

A blockchain-based distributed ledger allows all IDs placed in the wallet to be managed by the user so they can control which identity data they want to share with third parties, including financial service providers, government agencies, healthcare providers, etc. The incorporation of blockchain eliminates the need for an individual’s identity to be locked into each provider’s ecosystem. Fraud incidents like FTX can be eliminated since users have control over when, with whom, and under what conditions they share elements of their digital identity.

## The Need for a More Secure Framework

Digital transactions continue to trend upward, and a growing array of activities and interactions span the physical and digital worlds. The need for a more secure framework for goods, objects, and property rights must take shape, preferably sooner rather than later. With the right identity safeguards and controls, the industry can reduce fraud and facilitate growth and innovation online.

In conclusion, the collapse of FTX demonstrated that the crypto industry must address its identity crisis. Identity recognition is essential for building trust, and the adoption of SSI, coupled with blockchain-based distributed ledgers, offers a viable solution to address this issue. With the right controls and safeguards, the industry can reduce fraud and facilitate growth and innovation in the online world.