The collapse of crypto exchange FTX has brought attention starkly onto the crypto market in the last 10 days or so.
More than a million individual creditors from hedge funds to large traders to everyday crypto fans who used the exchange, remain unsure if they have lost their money.
Many commentators will use this example to warn about the perils of the crypto industry but this is not a failure of crypto. The collapse of FTX into Chapter 11 bankruptcy is a failure of proper governance, intra group circular revenue streams and unchecked leverage. The lessons that will be learned are not restricted solely to that industry – they are applicable everywhere and they are applicable to our industry also.
Those elements of transparency, trust, and governance are vital to any contract and relationship, and anyone considering borrowing money should be seeking firm assurances from their proposed lender before agreeing to any contract.
Always be prepared to ask your potential lender:
- Where is their funding from?
- Do they have proof of good governance?
- Is there a robust infrastructure in place?
- Is there transparency at all levels within their company?
Shop around potential lenders; get recommendations from others who may have borrowed; seek advice from a professional financial advisor; ensure your lender has a sound, long-term, established backer; and be prepared to walk away from any lender that does not fulfil your personal criteria, regardless of how tempting their offer may be.
These kind of questions often only get asked when it’s too late. For example, in the crypto industry, there is a mad rush for exchanges to show ‘proof of reserves’ for participants to show their customers that they are able to meet liquidity requirements in the event of heavy drawdowns. Those exchanges that fail this test, will find just how quickly customers rush for the door. More importantly, those that prove reserves quickly and with absolutely certainty and clarity, will find themselves holding the keys the to the future.
As we look forward to an uncertain economic future, we believe these things will come into sharper focus.
At Tenn Capital:
- We spent a long time building the operating model of our business.
- We have had a significant amount of independent due diligence on our infrastructure.
- We have first class auditors engaged.
- We have strong, experienced and independent board.
- We are incredibly transparent with all of our stakeholders.