Crypto’s hyped transparency remains muddy – AVCJ Forum

FTX, the crypto exchange whose bankruptcy this month sent shockwaves through the sector, was top of mind in a panel discussion that explored ways to get more traditional institutional investors into the emerging asset class. It was framed as the latest blow-up of its kind in an increasingly frequent phenomenon.

The company, which moved headquarters from Hong Kong to the Bahamas last year, began unravelling with media reports of balance sheet irregularities and Binance, its largest competitor, publicly selling off all its FTX-related tokens. This prompted a rout that saw some USD 6bn in tokens withdrawn from the platform in three days.

Jerry Zhao, an investment director at Binance, did not name FTX specifically but addressed rising concerns among institutional investors about the transparency shortcomings in cefi models such as Binance and FTX that tout defi ideals. He described the challenge as largely technical, pointing to risk management solutions still in early development.

“At the very core, it’s a mathematical issue,” Zhao said. “A lot of scientists and developers are trying to stretch that crypto trilemma, which is trying to be secure, speedy, and decentralised. When we cross that threshold, there are going to be applications that come out of this area that do what we’re trying to do – that address all those cefi concerns.”

It was also observed that instances of fraud should not be regarded as an indictment of an entire asset class, improved regulation would not ward off all bad actors, and that mainstream adoption would come with the recognition of crypto as a risk-on yet viable venture strategy.

Adam Goldberg, co-founder of specialist VC firm Standard Crypto and a venture partner at Lightspeed Venture Partners, further noted that the FTX episode had in some ways showcased the virtues of blockchain.

“Almost every single thing that was uncovered was uncovered from what happened on-chain, not what happened off-chain. When there were funds stolen at the end, people saw the on-chain movement of hundreds of millions of dollars of tokens,” Goldberg said.

“Sure, we don’t know who signed the transaction, if it was an insider or a hack. That’s not for us to figure out. But that’s the unprecedented level of transparency.”

However, Amit Rajpal, CEO and portfolio manager of Marshall Wace Asia, maintained that while the technology itself is transparent, there is little transparency in the cefi businesses that use it. He added that exchanges need to develop mechanisms that segregate custody services.

Two factors were singled out as reasons that Marshall Wace has so far hesitated to fully embrace the crypto space. First, the market is seen as insufficiently deep for a systematic trading firm that deals in large volumes and low returns. Second, the companies themselves have not instilled trust.

“FTX has proven that counterparty risk is real, and until we can gain confidence in counterparties, there is no point in even assessing this as an institution because we don’t want to be in the news,” Rajpal said.

“We might give up some returns, but the cost of being in the news for a large firm that’s institutionalised is much more significant than any incremental return you’ll pick up by doing this business.”

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