But there are perhaps some silver linings that could come out of this mess.
- Governance, controls, and transparency will be key
The situation at FTX was so bad that this will force a complete overhaul of the industry, accelerating the efforts of many of the large crypto firms to get their independent SOC or IASE certifications or an audit from the Big 4.
Many in the crypto ecosystem have been experimenting with “proof-of-reserves” to try to provide some level of comfort. Although these are a good step in the right direction, there are some flaws, from the lack of industry accepted definition on what “proof-of-reserves” actually means to the fact that these are often a snapshot in time.
There are numerous best practices, especially when it comes to governance, controls, processes, and procedures that traditional finance has implemented in recent decades that are quite effective and could be equally helpful in crypto.
However, the big question is whether the Big 4 will want to onboard many of these firms now as we should expect the client acceptance and engagement acceptance to be way more stringent thus creating a barrier to entry for many new players.
- The role of VCs during due diligence will be questioned
Many believed that FTX had proper governance or internal controls due to the extensive due diligence that they expected large equity investors had done.
For example, Temasek stated
that they had done extensive due diligence for eight months. And many of the large VC investors, from Sequoia to Softbank, used to talk about their experience and expertise in the sector.
But the fact that none of these gaps were raised as a red flag will bring into question the level of due diligence that such investors are expected to conduct and are actually conducting in practice.
This should create good business opportunities for consulting firms and due diligence specialized firms, as it is unlikely that any crypto deal will get approved in the upcoming months or even years at any investment committee without being sure that thorough due diligence was done.
And as very few investors have the in-house expertise (or such expertise is not trusted anymore), external specialized help will be sought by any investment committee before signing off on such a deal.
- Self custody will be sexy again
Many in the crypto ecosystem moved away from self custody in recent years as they trusted the large centralized players like FTX or Celcius. Whilst many institutional players are not allowed to self custody, this should act as a catalyst for a broader segment of the crypto user population to start exploring self custody again.
Whilst in the past, many of the hardware wallets were not user friendly and required a descent amount of technical skills, the offerings have become more simplified and user friendly in recent years.
Not surprisingly, crypto hardware provider Ledger reported record number of sales in the days following the FTX debacle.