Scallop’s 3 Commandments For A Safe And Secure Crypto Ecosystem
Last updated
Last updated
Scallop recently celebrated its first anniversary as the next-generation, decentralised crypto ecosystem that provides safe and secure financial transactions for users and partners. Being a licensed and regulated banking institution Scallop is able to offer a comprehensive suite of innovative banking products.
Our next-generation products have been launched to approximately 1.5 billion potential customers in the EU, Canada, and the UAE, where Scallop holds banking and crypto licenses.
Scallop’s banking ecosystem offers products and solutions built on the powerful and fully regulated Scallop Chain. This is a regulated, low-fee banking blockchain. You can build your bank on Scallop Chain. The blockchain is a fast fault tolerance blockchain with a core KYC & AML module included in the consensus mechanism at the protocol level.
We are passionate about serving our customers. However, this is not the best time to be in the crypto industry. FTX, one of the world’s leading crypto exchanges, collapsed into bankruptcy last week after discoveries concerning its business methods. This resulted in a rise in consumer withdrawals and FTX were not able to cover these withdrawals due to insufficient funds. The aftermath of this has made critics sceptical about centralised exchanges like FTX, saying they haven’t been reliable stewards of customers’ assets.
Unfortunately, FTX is just the latest in a long line of crypto exchanges that have imploded, taking their customers’ money with them. While it is painful to see our peers who share our passion for innovation fall and users lose money, it’s also imperative we understand why this has happened and what needs to change to avoid anything like it from occurring again.
In short, crypto billionaire Sam Bankman-Fried and the firm he built imploded dramatically, resulting in his net worth falling by 94% and losing the title of CEO at FTX. This forced his crypto empire to declare bankruptcy because of his dubious financial practices and mismanagement of user funds in his charge.
In early November, the crypto magazine CoinDesk published a shocking exposé called into doubt the stability of Bankman-Fried’s business. The research discovered that, even though Alameda Research and FTX are two independent firms, Alameda’s assets were primarily tied up in FTT, a currency produced by FTX. Though there is nothing technically wrong with it, it has thrown FTX’s liquidity into doubt, according to CoinDesk.
Just days after, Changpeng “CZ” Zhao, the CEO of Binance — undoubtedly FTX’s main adversary — chose to liquidate around $530 million in FTT. Customers also rushed to withdraw their assets which resulted in FTX haemorrhaging an estimated $6 billion in assets in 72 hours, which it strained to meet.
Binance announced on Tuesday, November 8, that it would purchase FTX, effectively bailing it out. However, Binance withdrew from the agreement on Wednesday, citing findings during their due diligence process, claims of mismanaged user cash with the risk of a government inquiry.
The news sent FTT tumbling further down which is what caused Bankman-Fried to lose 94% of his net worth in one day. Bankman-Fried, desperate for funds, began contacting other industry competitors, including Coinbase CEO Brian Armstrong, for assistance, but to no effect. FTX filed for Chapter 11 bankruptcy on Friday, and Bankman-Fried resigned as CEO.
This debacle started when Alameda suffered a string of losses, causing Bankman-Fried to shift client funds from FTX to Alameda covertly without informing anybody. Following the week’s events, there are already calls for stronger regulation of the cryptocurrency business, with stricter limitations on access and innovation.
To win the users’ trust, ‘Proof of Reserves’ is emerging as a Favoured Way to Prevent Another FTX. Proof of reserves (PoR) is an attempt to offer public transparency to centralized cryptocurrency reserves via verifiable audits. It employs cryptographic proofs, a public wallet address ownership verification, and periodic third-party audits to verify that a centralized platform has sufficient assets to match user deposits publicly.
To this end, Binance CEO CZ announced that it would start Merkle Tree or proof of reserves to support full transparency. He urged other crypto exchanges to do the same to build trust between exchanges and investors.
Scallop too stands firm on its principles of regulation, transparency, and security. To ensure the safety and security of our ecosystem, we have put in place a three-point plan that all participants must follow. These stipulations are critical to keeping our ecosystem strong and protecting the interests of all users and partners.
At Scallop, we firmly believe that users come first. Since our inception, we have believed that regulation is critical if the crypto industry is to survive and thrive. It is the world’s first licensed secured infrastructure providing a suite of banking products to empower millions of retail & business customers.
We have prioritized the protection of user funds whereby all user funds at Scallop are ring-fenced within our master corporate omnibus account and 100 per cent backed by the Binance custody solution. The Binance custody solution provides a combination of hot, warm, and cold storage that is sharded to minimize large-value groupings.
We take compliance and regulation seriously at Scallop. By adhering to all applicable laws and regulations, we can provide our clients with the peace of mind that their funds are safe and secure. The Estonian regulator licenses us to provide virtual currency exchange and wallet services in the EU. In addition, we have successfully secured Canadian MSB licenses, as well as a VARA license from the UAE. Our partners also ensure our cold and hot storage against loss of up to $100 million. Furthermore, our fiat funds are stored in licensed banks to safeguard them.
The reason for FTX’s collapse is because of the illegitimate use of client funds. The following steps ensure that we safeguard against such malpractices in Scallop transactions.
Our platform prevents this by maintaining a book-entry ledger of client funds hypothecated against our master corporate omnibus account.
This book-entry ledger keeps an auditable record of client funds as segregated claims against the omnibus account.
To perform any transaction against the omnibus account, we use a multi-signature authorization requirement, including two independent wallet key holders and a separate automated API key that is only accessible through an internal IP address.
The user can only initiate a transaction against their account through Scallop’s official application.
Scallop can only create transactions against the unhypothecated balance maintained in the omnibus account for cash and liquidity treasury management using the same multi-signature authorization.
Auditing the hypothecated and rehypothecated balances on the omnibus account is a regular practice performed by our finance and compliance officers. We have plans to automate this audit in line with European regulations, to eventually provide a transparent and independently auditable view to the public via our website. This ability is in line with the expected European regulation requirement. We are committed to being the first crypto custodial service to comply when this regulation is passed. This aligns with our business commitment to be the first fully regulated platform for crypto asset access by the user community.
Scallop has teamed up with some of the biggest names in the financial industry to provide our users with the highest levels of security and convenience. Binance Custody’s Integrated Institutional Services will ensure that Scallop’s user funds are always safe and sound, while Modulr’s digital payment services will make it easier than ever to send and receive payments. And for those who want the ultimate in security, Ledger’s hardware wallets offer state-of-the-art protection for your Scallop account. With partners like these, you can rest assured that your Scallop experience will be second to none.
After the recent spate of events where trust in the industry has taken a huge battering, we know that there is much work ahead to regain this trust. Therefore, we are committed to protecting the interests of our users. This commitment not only means that we will keep delivering the most innovative products and solutions, but we follow the best industry practices, thus allowing us to stay ahead of all the industry regulations. With Scallop’s 3-point plan, we will demonstrate to our users that Scallop is able to offer the most secure and transparent service in the crypto space.
