The FTX Meltdown and the Need For a (Re) Commitment to Proactive Governance and Compliance

While details continue to emerge about the meltdown at FTX, what we already know reinforces the need to institute modernized and global approaches to governance, risk, and compliance in the virtual asset space. All companies — from traditional financial services firms to those innovating in the virtual asset space — must adhere to core principles like customer protection, disclosure and transparency, prudential rules, and financial system integrity protections. While innovation will continue, responsible innovation is paramount, and companies like FinClusive are helping ensure responsible innovation in this nascent sector.

The issues we’re seeing play out with FTX’s collapse may be easy to label as ‘unique’ or as a reinforcement of the ‘anti-regulation’ and ‘cowboy culture’ labels given to crypto companies. In fact, these behaviors are actually illustrative of the very risks and vulnerabilities that have been, and continue to be, exposed in traditional finance (tradfi) — disclosure, over-leveraging, putting customer funds at risk, lack of transparency, and ineffective risk and compliance controls.

These processes are still not in place. Tradfi examples are aplenty: Madoff, MF Global, and the myriad exposures during the 2008 MBS/ABS crash. But the cratering of FTX now exposes the entire industry to the exact types of catastrophes that we’ve seen in tradfi (à la 2008). Thankfully, the contagion and systemic risk impacting the broader financial industry seem somewhat contained.

It’s important to note, however, that the exposed issues with FTX (and other ‘crypto-winter’ crashes we have seen this year) should not indict underlying blockchain and distributed ledger technology. These are not failures of the fundamental technologies virtual assets and related activities are built on, but rather the lack of human-centric disciplines, risk management, and governance controls we can and should expect of all financial market participants.

Unfortunately, these events threaten to cast a pall on the otherwise real and inclusive opportunities that digital assets and defi offer in a way that tradfi does not. But the failures at FTX weren’t related to the underlying attributes (decentralization, immutability, transparency, etc.) of distributed ledger technology and the blockchain. The basic lesson is that all financial services need to have controls in place to ensure financial system integrity and safe, secure, and equitable access.

The time for modernized regulation is now. Regulators should work proactively with industry to establish effective mechanisms for oversight and supervision. At the same time, the private sector must also take a proactive approach with regulators globally to systemically address risk issues. Incentivized self-governance is key. In cases where government intervention can negatively impact legitimate parties, this approach can better target bad actors, prevent financial exclusion, and embed transparency (e.g. the use of publicly viewable ledgers) that reflects both a commitment to security and opportunity.

The Rulebook, which FinClusive and many leading companies and trade groups have shepherded, is a strong example of incentivized self-governance — borne and developed by the sector and reflective of the realities of their operating and technology stacks. The Rulebook is helping a number of companies build a comprehensive and modernized FCC policy framework using a sector-driven and dynamic set of global standards. Incentivized self-governance has real benefits, but it also shows that the industry is taking a proactive approach to regulation.

That said, the industry also needs a comprehensive and global framework for risk and compliance. This type of cooperation will be imperative — innovative private sector solutions backed by regulatory power will reinforce democratic values, consumer safety, and system integrity. Distributed ledger technologies and innovative web-based applications are enabling financial services and products in new ways that address ongoing challenges like transparency, auditability, and verification, which remain a challenge even within the traditional financial system. Taking it further, such technologies serve to automate and embed ‘policy as code’ — focusing on implementing principles of risk, governance, and compliance into companies’ operations and the manner in which consumers and businesses interact with them.

One of these solutions is FinClusive’s innovative compliance-as-a-service (CaaS) platform, an automated full-stack financial crimes compliance solution in one workflow, designed for entities like traditional banks to modern financial technologies and web-based financial services. CaaS is built to support a wide array of industries and comply with modern global FCC standards and best practices in an increasingly cross-border, decentralized, and peer-to-peer financial services environment. CaaS and the Rulebook can be used to address at least some of the issues at the heart of the FTX meltdown. Prudent consumer-focused risk controls and market integrity tools will foster a more robust financial services sector — one resilient to human proclivities like greed and ignorance.

The FTX disaster exposes the need for a comprehensive approach to compliance in the digital financial services sector. Regulators and industry members can, and should, work together to push for smart, focused regulation that protects consumer interests and financial system integrity while continuing to enable financial inclusion. If nothing else, the FTX disaster shows that we can’t wait any longer to act.



Founder and CEO of FinClusive, a fin/regtech company that provides a full-stack compliance platform that facilitates global financial inclusion.

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Amit Sharma

Founder and CEO of FinClusive, a fin/regtech company that provides a full-stack compliance platform that facilitates global financial inclusion.