WSJ: Risk management and internal controls at crypto players need to be ramped up.

In the absence of a regulatory mechanism in the US, and particularly after the collapse of so many crypto industry players (including FTX – the latest and most high profile) there is all around concern regarding the procedures for risk management, fair accounting, and internal controls that must be implemented within the industry. According to the WSJ, though crypto firms have started to disclose more information about their affairs, investors are still not comfortable with the levels of transparency and accountability in the industry. (WSJ)

“We need better risk management, more guardrails…and we need some of that installed into the crypto industry,” said Jeff Horowitz, chief compliance officer at crypto custodian BitGo to WSJ.

On a ‘suo moto’ basis, many crypto firms have implemented systems for management of risks including cybersecurity, legal and compliance, credit and liquidity risks.

On the flip side, some controls that were already in place appear to be succumbing to the tide of bad news and finger-pointing that has engulfed the industry. Last month, accounting firm Mazars, which was conducting a number of Proof-of-Reserves (POR) audits for crypto exchanges like Binance, Crypto.com, and Kucoin following the FTX collapse last month, has stopped doing so.

The firm even went so far as to remove its recently published work for Binance from the web.

Notably, the United States Securities and Exchange Commission (SEC) also issued a warning regarding audits of cryptocurrency companies, saying that investors should be “very wary” about relying on a company’s proof-of-reserves.

What should investors do in these circumstances?

Here’s a check list from the WSJ:

• check for signs of adequate risk management and compliance measures
• check the type of licensing a company might have
• whether it is being audited and by whom
• seeing proof of reserves backing customer deposits
• asking for disclosures about the company’s business model
• determining whether the company has responsive customer service
• whether the company engages in outside due diligence
• whether assets are segregated, and
• how secure crypto assets passwords are kept.

However, all this is no substitute for formal regulatory oversight or the disclosure rules required of publicly traded companies, noted the WSJ.

Related Story: Niches Of The Cryptocurrency Market Have “Real Crash Potential” (Bankman-Fried)

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