Exchange Tokens — What Are They and Their Risks?
The recent meltdown of FTX’s native token — FTT, has brought another limelight to what exchange tokens are and their risks. This article would address what they are and the risks they present — taking a clue from what happened in the FTX’s ecosystem.
An exchange token is a token native to a particular cryptocurrency exchange. The tokens are minted by centralized companies that run cryptocurrency exchanges. Some of the best-known exchange tokens include Binance’s BNB, FTX’s FTT, KuCoin’s KCS, Bitfinex’s LEO, Crypto.com’s CRO, OKX’s OKB, Huobi Global’s HT, etc
You can term them “utility tokens” because — these respective tokens native to each centralized exchange are for utilities — serving as incentives for validators and stakers, footing transaction bills, generating capital and liquidity, governance token, and more. You can buy these tokens on their native parent exchanges or other exchanges, following the satisfaction of Know Your Customer’s (KYC) requirements.
Concerning the risk involved with exchange tokens — taking a clue from the recent happenings with FTX’s FTT token, what happened could be said to be a counterparty risk. Furthermore, centralized exchanges must have the liquidity to back up their transactions to stay afloat.
Counterparty risk is the probability that another party involved in a contract could default on their contractual obligations. It’s a situation where centralized exchanges took the advantage of their customer’s private keys, without having enough funds at hand to settle their depositor. That was majorly what happened with FTX, in addition to the liquidity issues.
The FTX CEO — Sam Bankman-Fried loaned up customers’ deposits worth $10 billion FTT tokens into his crypto trading firm named — Alameda Research, which amounted to more than half of the total FTX assets then. However, the exchange arguably doesn’t have the liquidity to back up its transactions.
That bankruptcy move got the FTT tanked, including other non-fiat currencies like BTC, ETH, SOL, etc, and also led to FTX.US frozen withdrawal since Friday. The move by Binance’s CEO to acquire FTX also got terminated following the liquidity crises and the alleged United State Agency investigation into the company.
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