The Cryptocurrency Market Struggles With Transparency

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Many of the biggest names in the cryptocurrency market are still dodging basic questions about their businesses, even as investors step up their scrutiny of the industry, according to a Financial Times survey.

Transparency over the protection of client assets and corporate governance arrangements have been put on the agenda after a number of failures and regulatory lawsuits focused on conflicts of interest and business practices.

In recent months, Binance, the world’s largest exchange, has been accused by a US financial regulator of operating illegally in the country and hiding its ties to China. Meanwhile, the collapse of FTX last year exposed the exchanges’ close ties to the trading arm of Sam Bankman-Frieds Alameda Research.

The high-profile cases have raised questions about whether some companies meet minimum consumer protection standards and about the quality of due diligence undertaken by a host of big names in private equity who have invested in crypto companies.

The UK market regulator has rejected 85% of 265 applications to join its crypto asset regime over the past three years, highlighting the compliance procedures scattered across the industry.

The FT surveyed 21 of the top crypto firms about their governance and management of client assets. Eight declined to share basic information, such as their headquarters, while others provided partial responses.

It’s a fundamental fear of sharing information, said James Newman, co-founder of perfORM Due Diligence Services, a group that does background checks on private companies in crypto, venture capital and real estate. .

When we are tasked with reviewing a crypto exchange or custodian, the first thing they do is often throw a nondisclosure agreement at you… This can be so restrictive that you can’t do the job you want you were engaged without one, he said.

The Financial Times approached the following companies:

Cryptocurrency exchanges: Binance, Coinbase, Kraken, KuCoin, Bitstamp, Bitfinex, OKX, Bybit, Gemini, Huobi, Crypto.com and Coincheck. Together, they represent the largest crypto exchanges in the world.

Genesis and B2C2, trading desks for professional investors; crypto lender BlockFi; Abra digital wallet and trading service; Market Maker Wintermute; DCG venture capital funds; Skip the crypto arm of Chicago-based Jump Trading; Amber Group, a trading and lending platform; and stablecoin provider Tether.

And asked the following questions:

Where are you headquartered and who is your primary regulator?

Do you have a board of directors? Who are the members ? Who are the independent directors?

Who is your chief financial officer and who is your chief compliance officer?

Who is your listener? What is the most recent year for which you audited the financial statements? Which entity was audited?

How many employees do you have?

Are client assets held in separate accounts?

Do you lend client assets or use them as collateral for loans?

For exchanges: do you conduct trading or market making activities? Do you or your senior management own or have common ownership/control with any trading or market making companies?

Do you match liabilities to customers with the same asset one-to-one?

Do you separate your trading and custody activities?

Do you have your own native coin/token? What percentage of assets is this?

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A full breakdown of each company’s disclosures is available here.

Data and Visual Journalism by Federica Cocco

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