“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
John Ray, FTX Liquidator
This week, we attended a conference that buzzed with the potential that is the digital financial market. There was confidence in the benefits that the tokenisation of financial instruments would bring, ranging from operational efficiency to real-time data that will transform portfolio management.
The one theme that was absent from the conference was risk management. There were references to FTX and coherent arguments as to why it represented an outlier, lacking much of the discipline and integrity that is evident in the rest of the industry. There was an appeal for calm and patience from ‘the authorities’, urging them to wait for the facts to emerge before acting. There was, in other words, much of what we have heard before, at different times and with different actors: Madhoff, Lehman, Archegos and so on.
Inadequate supervision, immature risk frameworks, and untested controls persist in both the traditional and tokenized markets. Risk remains, materialising in different forms with the same consequences.
The failures are two-fold:
to establish an effective risk framework
to properly due-diligence and understand your risk.
A prominent member of the House of Lords described the opportunity for the digitisation of markets as “massively significant” and “potentially bigger than the 1986 Big Bang”. To make it a reality, participants will need to prioritize risk management, avoiding the pitfalls of, for example, wrong-way risk.
The lessons learned in the traditional markets remain painfully relevant.
Douglas Lyons
Arboreal Risk Advisors
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