Austrian crypto exchange Bitpanda said on Tuesday that it had hired KPMG to verify that customer assets are covered by corresponding crypto funds in the exchange’s wallets. Only four of 23 exchanges listed on an “assets transparency” tracker published by Coinglass have appointed auditors for their liabilities. The tracker doesn’t mention Bitpanda. 

Crypto Market’s Structure
Still, audits may only be part of the solution.

Some of the risks in crypto stem from the way the nascent market is structured, with exchanges carrying out functions that in traditional finance are distributed between multiple entities — the majority of which are regulated, and many of which are also publicly traded.

That concentration of functions in crypto could lead to conflicts of interest and lack of transparency regarding client assets, said Jack McDonald, CEO of PolySign, which owns a crypto custodian and fund administrator.

The intractable nature of those issues was highlighted in a press release issued Friday by Bybit, one of the largest crypto exchanges. In the statement, CEO Ben Zhou called on the industry “to step up together and help reassure nervous customers and governments.”

Yet Zhou also said the “complexity” of crypto companies means “it will take some months for Bybit to complete and provide a comprehensive and true picture of its accounts that is acceptable to every stakeholder and helps re-establish trust — rather than patchy information that could ultimately confuse.”

Too Big to Fail
Many of finance’s current safeguards were put in place after the 2008 global financial crisis, when a surge in delinquent US mortgages caused a banking industry contagion, leading to a deep recession. The term “Too Big to Fail” entered the vernacular, describing organizations that had gotten so systemically important that they had to be bailed out using taxpayer money.

Then, as now, opacity compounded the problems. In 2008, it was shaky mortgages packaged into complex securities; with FTX, it was financial entanglements with trading house Alameda Research that reportedly involved customer funds and ultimately blew up Sam Bankman-Fried’s empire. FTX is facing a probe by US prosecutors.

“The crypto market does not feature currently many of the safeguards of traditional market structure, and a lot of its recent issues are rooted in a lack of transparency,” said Anish Puaar, head of European equity market structure at trading firm Optiver. “One wonders whether a lot of this pain could have been avoided with better protections.”

Some regulators are prodding the industry in that direction. Singapore’s central bank has proposed that exchanges must properly segregate customers’ assets and disclose what would happen to them if the firm becomes insolvent. It has also proposed that firms mitigate any potential conflicts of interest arising from the multiple roles they perform.