How the FTX crisis will impact crypto businesses

What you can do to reduce risk for your organization

Gil Hildebrand

Nov 17, 2022

Happy Thursday to all of the web3 builders continuing to scale their organization during these crazy times. ☕

Before we dive in, just a quick announcement: we are hosting a kickoff webinar for our Crypto Accounting Partner program next Tuesday, November 22.

Accounting pros: learn how Gilded can help your firm make the most of blockchain technology, attract more crypto clients, and connect with other accountants in the space.

This Week’s Topic

🔮 How the FTX crisis will impact crypto business

While the situation is still unfolding, here are my predictions for how the FTX crisis will impact crypto business.

Why it matters: The fallout from this entire debacle has everyone in crypto on high alert — and for good reason. Investors want to understand the risk profiles of their portfolio companies; users want to know more about where they’re storing their funds; businesses must provide transparency to all stakeholders. Ultimately, the industry will emerge stronger and more resilient from all of this.

But where do we go from here? And how will this play out in the coming months and years?

Five Predictions:

1. Government regulators will propose and successfully pass legislation to further regulate exchanges that custody client deposits

In traditional finance, this is the norm as banks must have a certain amount of reserves and audits with regular attestations. It could take a while for these regulations to pass, but there will likely be support amongst both congress and policy experts within the crypto industry.

2. Before that takes effect, legitimate exchanges will race to demonstrate proof of reserves and liabilities

Exchanges will get ahead of any legislation with a higher level of transparency like Binance and others have already demonstrated. It’s also a competitive advantage versus exchanges that don’t provide these proofs. But it’s not enough to just provide proof of reserves, as you need to understand the exchange’s underlying liabilities as well.

3. The term "segregated wallets" will enter the lexicon

This means that if you’re an exchange, every customer would have their own wallet — or a segregated wallet. Currently, most exchanges have an omnibus wallet, where all funds are in one place. The problem for investors, as we saw last week, is that it’s hard to know if all of your assets are there or being used elsewhere.

I don’t believe that everyone will pursue this path because key management will become more complex. It’s also more expensive in terms of gas fees, and accordingly slower and less scalable with many blockchains’ limited throughput. However, some exchanges will offer it to a larger base of their customers to gain a competitive advantage.

4. Treasury management policies will become more robust, including greater scrutiny of top token holders

Investors will want to see treasury updates on a regular basis, including who are the top holders of the tokens being held. For example, if a business held FTT and knew Binance and Alameda were the top two holders of the token, it might be cause for suspicion.

5. Investors will demand that venture-backed startups implement risk-management policies

Many venture-backed startups held funds on FTX, which directly impacted their runway. Moving forward, stakeholders will want to see real-time holdings of these startups, including whether or not funds are in centralized exchanges vs. non-custodial wallets or hot vs. cold wallets. As crypto companies look to reduce risk, they will need to be able to share this info in real-time.

The Bottom Line: As crazy as these times are, I’m optimistic that the people working in crypto will learn critical lessons from the FTX crisis and push things forward in a positive, professional manner.

From the DeOps World

📚 What we’re reading

Circle and USDC add support for Apple Pay

Don’t let the events of late distract you from progress: millions of Apple Pay users can now pay with the stablecoin USDC. This is a huge step towards mass adoption in crypto payments.

Learn more from Circle

SBF used an accounting back door to hide funds transfers

SBF had software in place that allowed him to move funds without raising alarms. Again, this is why we need both better risk management procedures in crypto organizations and internal controls in place.

Crypto accountants’ lives made easier with new accounting rules

J.W. Verret sheds light on how the new guidance from FAASB is helping public companies hold crypto on their balance sheet.

“The FASB should be saluted for its thoughtful adaption of accounting principles to this new technology, an approach the Securities and Exchange Commission and other financial regulators might learn from. The FASB hired crypto-native experts and adapted their rules to the reality of this new technology in a short period of time, ensuring that in the crypto revolution, GAAP is going to make it.”

Go deeper with this story from Verret on Cointelegraph

👾 Crypto Accounting and Finance Job Board

ICYMI from last week: our friends at Multisig Media launched a job board specifically for accounting and finance jobs in web3. If you’re looking for an accounting job in crypto, there’s no better time for you to find work.

Take a look at the new job board

That’s all for this week.

We’re officially five editions into this little newsletter. I’m so grateful you let me pop into your inbox every week.

What do you like or dislike about the newsletter? Want to see more or less of something?

Leave a comment or reach out on LinkedIn or Twitter.

Cheers,
Gil

Brought to you by Gilded 💡

This newsletter is strictly for informational purposes only and does not constitute financial, investment, or tax advice. As always, do your own research.

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