According to the latest Bloomberg News investigation, many reputable cryptocurrency exchanges and other companies involved in decentralized finance failed to learn their lesson when market giant FTX collapsed in late 2022.
Since it is hard to believe that the successful crypto exchange empire established its three-member board only at the end of its existence and has never held a board meeting, the news outlet wanted to verify whether this was an exceptional case. The results of the study are startling, as only half of the sixty assessed companies did their best not to repeat the mistakes of the $32 billion crypto exchange. Bloomberg News' study included sixty leading crypto companies with different profiles, such as cryptocurrency issuers, miners as well as analytics businesses, and was not limited exclusively to crypto exchanges.
The criteria the news platform used to select the companies for its survey-style investigation were a minimum value of $1 billion in private fundraising or significant market influence as of January 2023, as well as a public listing. Thus, the survey covered such prominent crypto market representatives as OpenSea, Coinbase Global, Binance, and Tether.
Bloomberg News directly asked the companies to answer its questions and confirm or reject the public information available between January and May 2023. Interestingly, the news portal originally planned to survey more companies, but seventeen declined Bloomberg News' invitation and eight simply did not respond. However, for some of these companies that ignored the invitation to participate in the survey, the information in question was publicly available.
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The study showed that only thirty-one companies confirmed that they have full financial audits performed by independent firms. While seven companies do not use the services of independent auditors, this information is unknown for twenty-two companies. Only twenty-four companies disclosed this information themselves, while 46% of them named Big Four accounting firms Deloitte, KPMG, Ernst & Young (EY), and PricewaterhouseCoopers (PwC) as their financial auditors. Circle, Ripple, Coinbase, Chainalysis, Anchorage Digital, and Ledger are among the companies using the audit services of the Big Four.
In fact, while some governments intentionally refrain from auditing their companies, industry standards for assessing crypto businesses have yet to evolve. As professor and entrepreneur Sean Stein Smith said in the 2022 Forbes article, "The crypto asset marketplace has exploded in valuation, utilization, and adoption amongst individuals, enterprises, and nation-states, with the accounting profession seemingly left behind in the process."
Smith added, "Crypto assets may indeed represent novel and innovative financial instruments, but ultimately must answer to the same law of economics as any other asset class. Focusing on developing consistent, objective, and realistic standards must be an imperative for accounting standard setters moving forward."
Smith also emphasized that "an audit is not (yet) a total review of every transaction and entry at an organization, nor is supposed to be thought of as a guarantee of financial success or health. Rather, and in non-technical terms, an audit is a report on whether or not the financial data being reported is done so in compliance with the appropriate accounting standards and rules."
At the same time, some accountants concerned about FTX's collapse are now unwilling to work with crypto-related companies at all.
Financial experts, including Ruth Foxe Blader, a partner at venture capital firm Anthemis, believe that audits and independent boards are fundamental standards for all companies working with investors and especially for those involved in the cryptocurrency business. But despite the promises of transparency and record-keeping that are inherent features of blockchains, many companies working with this technology fail to meet these basic requirements.
In addition, more and more investors expect crypto startups to have at least one independent director by a Series A round. According to the Bloomberg News study, thirty-eight survey participants had at least one outside board member, while ten did not, and for the rest, the information was either not available or they refused to provide it. The companies without independent board members included Huobi, Magic Eden, and Tether.