Sufficient due diligence on exchanges will influence the industry in 2023[Opinion]| coindesk JAPAN | Coindesk Japan


The crypto industry has lost a lot in 2022, but there is widespread optimism that it will come back strong and for the better.

According to Doug Schwenk, CEO of Digital Asset Research (DAR) and analyst in the field of digital assets, one reason for such optimism is risk awareness. It’s a good investment and good due diligence.

Conduct monthly scrutiny of exchanges

“When prices were always going up, people tended to ignore risk management in general: Terra/Luna, FTX, Three Arrows Capital, Celsius. “With the collapse of Celsius Network and BlockFi, there is a growing movement in the industry to refocus on risk management,” Schwenk said.

Over the past five years, the DAR has called on investors to conduct counterparty due diligence.

As a free service, DAR conducts monthly scrutiny of cryptocurrency exchanges. We vetted over 450 exchanges in January and gave the following 18 exchanges a “vetted” seal of approval.

Binance.US, bitbank, Bitfinex, bitFlyer, Bitso, Bitstamp, Bittrex, BTC Markets , CEX.IO, Coinbase, Coincheck, CrossTower, Gemini, itBit, Kraken, LMAX, Okcoin, Zaif ).

It also named 10 exchanges as a “watchlist exchanges” that could be included in the “very vetted” list in the future.

Binance, Bitrue, CoinEx, CoinTiger,,, Huobi, KuCoin, LATOKEN, Phemex.

Expectations for transparency

DAR’s main business is to work with institutional investors to conduct detailed due diligence on cryptocurrency investment opportunities.

Many institutional investors are now using DAR’s exchange vetting and counterparty diligence services, according to Schwenk. Rather than scrutinizing one or two counterparties at a time, they often scrutinize 10 or more, and many investors consider using multiple exchanges to spread counterparty risk. It can be seen that

“The industry faces multiple challenges and we see it as an opportunity to raise the bar as an industry. One of the main challenges is the immaturity of counterparties. It’s a stumbling block. It’s not as well-maintained as we would like,” Schwenk said.

Furthermore, he said, there are many bad guys in the crypto industry. But distinguishing the immature from the bad is often only possible in retrospect after losing money.

Transparency is the way to mature the industry and increase trust in crypto. After a string of bankruptcies in 2022, expectations for transparency from investors and consumers have risen to new heights.

“We are working to define and build transparency expectations and demands that are reasonable to the maturity of the industry and necessary for risk takers. So, in theory, there will be many solutions for the problems we are working on, such as how to trade on Binance when customer assets are segregated, and for CFDs,” Schwenk said.

FTX case

FTX, which went bankrupt in 2022, was not on the DAR’s scrutinized exchange list prior to its bankruptcy.

“FTX wasn’t on our vetted list, but there are definitely things it did well, could have done better, or missed.”

“FTX’s due diligence based on public information was immediately identified as a problem. It is possible to trade without proof, which raises concerns about wash trading, market manipulation and money laundering.”

An ambiguous relationship with crypto hedge fund Alameda Research was another red flag, according to Schwenk. Efforts to get FTX to clarify its ties to Alameda were rejected.

Sam Bankman-Fried eventually stepped away from Alameda Research to focus on FTX, but his continued involvement with both companies remained vague.

“They weren’t very candid. One of the things we were right about was recognizing that we didn’t have clear information about how we were managing the conflict of our involvement with the two companies. Of course. We couldn’t come to any firm conclusions, but given the lack of policies governing the relationship between the two companies, it’s understandable to raise suspicions, and one can’t help but wonder why they didn’t try to address this issue. do not have”

Another concern is that FTX’s native token FTT is actually a security and FTX may have violated securities laws.

flashing red light

DAR was asked by a major hedge fund to conduct due diligence on FTX. But when analysts asked FTX to be more transparent, it met with resistance.

“We asked for greater transparency about a lot of what we consider to be sensitive information. FTX’s response was, ‘We have absolutely no intention of engaging in due diligence, especially given the questions you may be expected to ask.’”

So Schwenk and DAR used personal relationships with FTX officials, but the due diligence they were trying to conduct was “thwarted.”

Cryptocurrency exchanges that are interested in attracting big customers but refuse to do a reasonable amount of due diligence are “flashing a red light,” said Schwenk.

“If you do, there is valuable information in the tone and manner of your answer. It seems

“As the COO of a billion-dollar hedge fund, I survived the financial crisis. We stayed away from Lehman because of the inherent risks, which kept us out of the bankruptcy,” Schwenk recalled, adding, “Crypto people need to adopt a similar mindset in tough times. There is,” he continued.

|Translation and editing: Akiko Yamaguchi, Takayuki Masuda
|Image: Shutterstock
|Original: Better Exchange Due Diligence Could Help Define Crypto’s 2023

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