Introduction
Governance failures have been at the core of more than one business breakdown, and the collapse of the cryptocurrency exchange FTX last November is a spectacular case in point. According to authorities, FTX lost more than $8 billion of its customers’ money, leaving a range of corporate and individual investors holding the bag and eroding trust in the crypto ecosystem more generally. Untangling precisely what happened and how will take time, but governance questions are likely to extend beyond FTX to institutional investors, such as the Ontario Teachers’ Pension Plan and Sequoia Capital, that appear to have failed to perform sufficient due diligence.
Many of the governance failures at FTX—such as the apparent comingling of client funds, inaccurate bookkeeping, and misuse of corporate funds—had little to do with crypto; they are similar to the flagrantly illegal
activities at firms such as Enron and Madoff. But unlike the traditional finance (TradFi) system, much of the crypto ecosystem lacks adequate rules of engagement and appropriate controls. Indeed, many of its developers sought to create a financial system that relied upon computer code for such rules, intentionally eschewing centralized control and regulation.
Consequently, crypto is peppered with issues in governance that, if left unresolved, risk more business failures and customer and investor losses. This will inevitably erode trust. And if crypto becomes materially more consequential and interconnected over time, such failures could lead to generalized financial stress. As discussed in earlier Bretton Woods Committee Digital Finance Project Team (DFPT) briefs, this could jeopardize the realization of what could be important benefits from responsible innovation in financial services.
