The Need for Transparency in the Crypto Industry
Summary
- Calls for greater transparency in the crypto industry are growing louder as the fallout from the collapse of FTX continues to create ripples
- Amidst the chaos and a lack of uniform regulation in the industry, crypto companies have been forced to come out and explain how transparent they are in their operations
- The main lesson to be learned from the present crisis is why centralized crypto platforms and companies require transparency, which the existing legal structure cannot provide
Following the collapse of tokens such as TerraUSD and the bankruptcies of firms holding customer money, such as Celsius Network and Voyager Digital, crypto owners were likely already on high alert for problems when concerns about FTX began to surface.
Calls for greater transparency in the crypto industry are growing louder as the fallout from the collapse of FTX continues to create ripples. Investors, consumers, and regulators want to know how an exchange of such magnitude could crumble within days.
As the TradFi industry continues to learn from crypto, the reverse is also true. Investors and consumers have the right to demand the same regulatory accountability, transparency, and trustworthiness as the TradFi industry, given mainstream banking’s increased level of incursion into the crypto space.
This is a fair point of view, especially after a year in which several crypto firms have failed, costing billions of dollars in investor losses and the sector’s reputation, leading some market pundits to question if crypto will still be around in the future.
Amidst the chaos and a lack of uniform regulation in the industry, crypto companies have been forced to come out and explain how transparent they are in their operations. Unlike Tradfi, where laws have defined transparency, the crypto industry can only self-regulate, and this has left a gaping hole in implementing standardized procedures for wider transparency.
What are some of the measures crypto companies can undertake to ensure enough information is available to investors?
The main lesson to be learned from the present crisis is why centralized crypto platforms and companies require transparency, which the existing legal structure cannot provide. Promoting openness among centralized trading platforms and exchanges about their proof-of-reserves is necessary to rebuild the community’s damaged confidence.
When Binance CEO Changpeng Zhao said on November 8 that the platform’s genuine reserves audit mechanism will be made public, the idea that cryptocurrency exchanges should disclose their proof-of-reserves received recognition in the crypto community. When this is done, crypto investors can check the platform’s reserves before making any investment choices.
It is crucial to recognize that even if fair, adaptable, and objective legislation does materialize, it possibly won’t stop dishonest schemes in the industry. There is growing suspicion that some of these acts may have been, at best, questionably lawful as more claims about what exactly was happening at FTX and its related businesses come to light. Regulation will only stop bad actors from misbehaving. The cryptocurrency industry shouldn’t be regulated the same way as conventional financial institutions because important distinctions must be made in any regulations that are implemented.
The current scope of reporting and disclosures made by crypto companies leave much to be desired, leading consumers to misunderstand the true standing of their investments and the financial position of entities. Organizations operating in the crypto industry should ideally take advantage of the fact that blockchain-based transactions are, by nature, transparent and traceable. A lack of proper reporting should prompt consumers to question the real reason as to why these disclosures aren’t made in the first place, especially for a sector that brags about its capacity to upend the conventional financial system through disruption.
Since its advent, blockchain has made it possible to build new asset classes and business models. Institutions worldwide are beginning to understand the opportunities digital asset markets provide. However, the crypto industry has to come together to stop a wave of high-profile failures, hacks and security breaches if institutional adoption needs to gather pace by focusing on accounting, financial reporting, risk management, and governance.
The Future of Crypto
The meltdown of FTX is an ominous warning for consumers that believe an entity is too big to fail. While the recent events have eroded consumer confidence, there is no denying the fact that a larger conversation has begun within the industry with regards to rules, compliance, and overall risk management approach. While the short term might see a flight of users to DeFi, the wider industry will weed out unrealistic projects by adhering to greater transparency and holding companies accountable to consumers.
At FLUID, we are thoroughly aware of the compliance challenges immediately facing our nascent industry and the fast-evolving virtual asset regulatory frameworks facing all participants globally.
In putting ourselves forward as a business partner and engaging with both the retail and institutional community and operating in an industry that is fraught with a reputation of harboring bad actors, FLUID and its full ecosystem – from member exchanges and liquidity takers to token holders – strives to adhere to the highest compliance and security standards by constantly reviewing our internal and external policies and procedures.
