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The shadow of FTX continues to loom large
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As the long-awaited repayments from the FTX bankruptcy estate begin to make the way to the marketplace making a surprising number of investors whole (albeit at November 2022 prices) the long shadow of this fraud and bankruptcy seems to finally be receding from the collective minds of crypto investors and policymakers. With bitcoin continuing to hover around the $100.000 mark, the U.S. government researching the investment potential around digital assets (including bitcoin), and nearly 20 states having introduced legislation to begin investing in digital assets, the crypto space has moved firmly into the mainstream.
Even with these advances, however, there continue to rug-pulls, hacks, breaches, and other negative and unethical events besieging the sector. Notably the President of Argentina was recently involved what was later discovered to be an unethical token launch that led to losses for many initial investors. Details remain to be uncovered in that case, but when combined with the meme coins launched that are associated with the U.S. President and First Lady investors and policy advocates should still move cautiously as digital assets continue to gain investment attention from institutions across the board. FTX serves as lesson for the damages that can be caused by small group of bad actors, and these lessons can be applied to the private sector as well as state based reserves alike.
Internal Controls And Custody Should Be Paramount
While the cryptoasset sector is more mature than some newer investors might realize (the original bitcoin whitepaper was published over 15 years ago) many of these institutions are relatively new entrants to the sector. If one lesson can be gleaned from the testimony and court hearings that occurred during the FTX trail it is the internal controls, separation of duties, and other internal workflow processes need to be of paramount importance for crypto firms. While FTX might be held up as one of the prime examples of failures related to corporate governance and internal controls, the entry of states into the crypto space elevates these concerns to an even higher level.
If states, pension plans and even some endowments actively invest into bitcoin and other cryptoassets those investments are – be default – being made with the funds of others that have been entrusted to fund managers. With many state finances on somewhat shaky footing due to inflation and economic uncertainty – punctuated by political turmoil – pension plan managers must continue to exercise appropriate levels of due diligence even as crypto prices and adoption continue to rise.
With potentially billions of dollars set to be allocated to bitcoin and digital assets, internal controls must remain at the top of the list for institutions going forward.
