Digital Asset Research (DAR), an industry-leader in cryptocurrency exchange vetting, today is sharing its reflections on FTX warning signs, missed opportunities to identify issues, and ways to strengthen diligence moving forward. Since 2017, DAR has conducted diligence on centralized crypto exchanges, including FTX, for its institutional clients.
“FTX’s failure offers a rare opportunity for the digital asset industry to redefine and enhance diligence standards for exchanges and other counterparties,” said Doug Schwenk, DAR’s CEO. “In its aftermath, we evaluated what went right in our diligence, what we overlooked, and how we can lead the industry toward stronger standards.”
Each quarter, DAR’s Exchange Vetting for Price Quality process identifies Vetted Exchanges that meet institutional standards and Watchlist Exchanges that may qualify for future inclusion. Prior to the collapse, FTX.com was a Watchlist Exchange, while FTX US and Liquid were classified as Vetted Exchanges after communication with insiders indicated they operated as independent entities with appropriate policies and transparency.
As part of its vetting, DAR flagged a number of warnings regarding FTX.com, including:
1. Loose KYC and AML policies.
2. Alameda Research as an affiliate without any disclosure as to how conflicts of interest were addressed.
3. FTT token and its risks.
4. Unwillingness by FTX and its entities to provide confirmation of certain public diligence information.
5. Lack of transparency and tone of FTX.com as a counterparty.
With hindsight, DAR identified some missed opportunities related to the evaluation of FTX:
1. Attributing FTX.com and FTX US unwillingness to respond to diligence questions to immaturity rather than an attempt to avoid scrutiny.
2. A delayed reaction to Brett Harrison’s departure as CEO of FTX US, rather than a key leadership change prompting an immediate reassessment.
3. A slow response to the freezing of client withdrawals because of a presumption that a deal with Binance would restore order.
4. Underestimated the risk of the FTX.com and FTX US affiliation.
5. Overweighted the importance of FTX’s market share and strength of market presence.
Moving forward, DAR is using the information discovered in its reevaluation of the FTX situation to evolve and improve its frameworks for assessing price risk, reputational risk, and counterparty risk associated with crypto exchange. DAR remains independent and unbiased throughout the diligence process.
More in-depth information on DAR and “FTX Diligence: What We Got Right, What We Missed, What’s Next” is available.