Javier Paz (Forbes): Crypto Exchange Audits: Marking their Own Homework
The collapse of the FTX cryptocurrency exchange should redirect the attention of altcoin investors from the market risks of holding virtual currencies, says Javier Paz, the Director of Data and Analytics at Forbes. Instead, they should be alert to hazards posed by the platforms on which cryptocurrencies are traded being unaudited.
How scared should investors be that many crypto exchanges are not audited?
Investors should be very concerned and do their due diligence following the collapse of the FTX exchange amidst allegations of fraud. Frankly, cryptocurrency exchanges haven't done their homework in terms of how to take care of people's money. The very light touch of external supervision of exchanges has enabled a lot of rogue activity. Half exchanges did not respond to an inquiry about whether they were audited and many admitted they were not. There also seems to be a reluctance by the big auditing firms to take on auditing these exchanges. There are parallels in how charismatic CEOs like Binance’s Changpeng Zhao or Bankman-Fried of FTX diverted attention from data. The resulting opacity obscured how they do business.
“Frankly, cryptocurrency exchanges haven't done their homework in terms of how to take care of people's money.”
What is driving the consolidation of the crypto market?
There were 600 crypto exchanges last year and about 200 more today. But the duration of the crypto winter has taken the energy out of this big crypto trend. Crypto data firms like Coingecko have shown how exchanges volumes have gone down to a trickle, maybe $1,000,000 or $10 million worth of daily trading activity when it used to be hundreds of millions of dollars. During the bull market, the websites that went on to fail were touting crazy growth prospects for crypto assets. They came out of the woodwork and promoted very rogue crypto proposals. The messages were new and exciting, but also fraudulent in many cases.
Which risks and opportunities arise from your data and research of the crypto exchanges and the crypto market?
My forensic analysis of these firms attempts to reveal who the counterparties are and how much money is transferred from one firm to another to paint a picture of stability. It remains an opaque industry by choice but we are hoping for greater transparency in the future as innovative tools will track the exposures of these firms. But there are parallels with traditional finance as well where there is a lot of opacity in over-the-counter activities, trading derivatives, and some very esoteric instruments where investors don't know enough about what's going on. But I think in the end transparency is going to benefit both sides of finance.