QuadrigaCX continues to provide lessons for crypto investors

Streaming services may not be the obvious place to start conducting research on cryptoassets and crypto exchanges, but that would be an incomplete view. The recent release of a Netflix original documentary centered around the saga and intrigue that continues to surround QuadrgiaCX has reignited discussion on this topic. As institutional adoption of cryptoassets continues to accelerate, nation states actively allocate people and resources to the development of state-backed crypto, and investors become more comfortable with cryptography, QuadrigaCX should continue to be seen as a cautionary tale.

Investors are no strangers to volatility, and crypto has certainly had its fair share of volatility and headline-driven themes over the past few years. Especially as new iterations of cryptoassets create complicated and intriguing securities from a tax, valuation, reporting and custody perspective, it can be easy to overlook the fundamentals that underlie tend this trillion-dollar asset class. Non-fungible tokens have reached exorbitant valuations, and decentralized finance continues to provide outsized returns to investors while coming under increasing scrutiny from regulators.

In other words, as crypto continues to mature, get more complicated, and release flashier applications, investors at all levels should remember the valuable lessons learned from QuadrigaCX’s failure. Let’s take a look at a few of them.

Crypto is not self-contained. As advertised as the decentralized aspects of crypto-assets are, and rightly so, there is an inescapable element to the vast majority of projects, products and services; they are developed and managed by people. This is especially true for more centralized exchanges and cryptoassets, which are also the apps that tend to be easier to use for retail investors. In other words, even if there is no sign of human influence or interaction on the crypto products themselves, or the advertising of these products, there are almost always people involved.

Researching an organization’s leadership team is just as important as researching the specific product itself. Highlighted in the many revelations that surfaced when QuadrigaCX collapsed following the death of its co-founder and CEO, this singular individual wielded far too much control over the back-office components of the organization. Automation and reducing the need for human touchpoints hold tremendous promise, but must be balanced with policies to prevent abuse.

Regardless of an individual’s background, questionable or not, there is always a need to have strong internal controls.

Internal controls are important. Go fast and smash things might be the motto that many tech-focused startups have embraced, but it has to be weighed against the reality that custodial fund management needs to change that mindset. With an estimated $150-200 million lost in what turned out to be blatant fraud and a Ponzi scheme, the lack of internal controls – highlighted at QuadrigaCX – is an issue that has emerged as the primary cause behind d other crypto hacks. Admittedly, this is never the hottest topic or the most exciting part of the crypto conversation, focusing on internal controls – especially where client funds are involved – is essential.

For example, it would seem reasonable to expect that any organization managing customer funds and offering custodial services – fiat or crypto-denominated – would have a robust system of controls over who has access to the funds, how the trading activity is reconciled and how records are audited. . As individuals and institutions continue to treat crypto as an asset class and various crypto-assets are assigned to portfolio positions, it makes perfect sense that internal controls keep pace.

Investors might consider QuadrigaCX an outdated example, but given the rapid growth of the DeFi and NFT industry, are investors really confident that every exchange processing millions or billions of transactions has controls up to par?

Equivalent regulation makes sense. This all leads to the next point; if crypto exchanges and crypto organizations seek to offer products and services that mirror those of incumbent organizations, the regulations must also be equivalent. Despite all the talk about how blockchain and crypto-assets will revolutionize the global payment and financial system – which it will significantly change – there must be safeguards for investors of all sizes.

In the past two years alone, there have been dozens of hacks, with billions in losses accrued by investors, and many of those investors are individuals who find themselves without much means to recoup those losses. Along with these hacks and breaches, and subsequent scrutiny by regulators, some players in the crypto-asset industry are pushing back with arguments that new regulatory paradigms are needed.

This may very well be the case, but if organizations manage customer funds, hold customer funds, and transact on behalf of those customers, those organizations must be held to the highest possible market standards.

The saga, scandal, and controversy surrounding QuadrigaCX is both a tale of the early days of crypto and also a wake-up call for investors new to the space. While crypto trading has certainly become more mainstream, with publicly regulated and audited organizations dominating large swaths of the space, many emerging areas have regulators catching up. Something investors should always keep in mind is that no matter how innovative or creative a product, service or organization is, internal controls and investor protection are always in place. important.