The cryptocurrency market struggles with transparency

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According to a survey by the Financial Times, many of the biggest names in the cryptocurrency market still evade basic questions about their businesses, even as investors step up their scrutiny of the sector.

Transparency around safeguarding client assets and corporate governance agreements have risen to the agenda after a series of bankruptcies and lawsuits centered around 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 that of the exchange close ties with Sam Bankman-Fried’s Alameda Research Commercial Division.

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

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

The FT asked 21 of the top cryptocurrency firms about their governance and customer asset management. Eight declined to share any background information, such as where they are based, while others provided partial answers.

“It’s a fundamental fear of sharing information,” said James Newman, co-founder of perfORM Due Diligence Services, a group that checks the backgrounds of private firms in cryptocurrencies, venture capital and real estate.

“When we are commissioned to review a cryptocurrency exchange or custodian, often the first thing they do is throw you an NDA . . . It can be so limiting that you cannot do the job you were commissioned to do without one,” he said.

The Financial Times addressed the following companies:

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

Genesis and B2C2, trading desk for professional investors; cryptocurrency lender BlockFi; digital wallet and trading service Abra; market maker Wintermute; venture capital fund DCG; Jump: the Chicago-based crypto arm of Jump Trading; Amber Group, a trading and lending platform; and stablecoin provider Tether.

And he asked the following questions:

1. Where are you based and who is your main regulator?

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

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

4. Who is your auditor? What is the most recent year for which you have verified financials? Which entity was audited?

5. how many employees do you have?

6. Are customer assets held in segregated accounts?

7. Do you lend customer assets or use them as collateral for loans?

8. For exchanges: do you carry out trading or market making activities? Do you or your senior management own or have common ownership/control with trading or market maker companies?

9. Do you match liabilities to customers with the same asset one by one?

10. Do you segregate your trading and custody activities?

11. Do you have your own native coin/token? What is the equity percentage?

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A comprehensive analysis of the information provided by each company is available Here.

Data and visual journalism by Federica Cocco