Center for
Issue #42
January 2023
Crypto, regulation and governance
The recent bankruptcy of FTX, a crypto exchange with a volume of $627 billion in transactions1 and an estimated hole of $8 billion2, raises at least three main questions: 
How could its demise have happened if it was backed by highly specialized investors? How is crypto activity being regulated across different jurisdictions? Could crypto runs have poisoned the rest of the financial market? 
As the news about FTX unfolds, we are learning that a series of corporate governance problems are at the core of its fall. There was a clear lack of corporate control procedures, of internal controls, and of internal and external auditing as well as inappropriate accounting practices. FTX’s board of directors consisted of only three people (one of them was FTX’s founder Sam Bankman-Fried, now facing charges in the US3). Top management was tied by long-term friendships (they even shared a penthouse4) and these ties connected FTX with Alameda Research, potentially generating conflicts of interest. Relevant decisions and information about the company were circumscribed to this small, closely knit group, thus they were not subject to the proper checks and balances. Moreover, investors did not realize that these control absences, together with the massive power that FTX held (it held an exchange, issued crypto-currency and was backed by a set of venture capitals firms, of which at least one operated on their exchange) could become troublesome. 
The structure of FTX was highly complex, with branches situated in different countries and many companies intertwined: FTX Trading Ltd. in Antigua and Barbuda, Alameda Research based on the British Virgin Islands5, FTX headquarters on Bahamas6, and a company in the US. The group also holds companies in Hong Kong, the Cayman Islands and Cyprus. The transnational nature of the business and the ease at which the company moved around (FTX was originally located in Hong Kong then moved its headquarters to Bahamas7) severely hampered the ability to regulate it. 
Crypto legislation is still a work in progress across many jurisdictions around the world. In the EU, the European Council approved MiCA and the European Parliament is set to vote and approve it in February 2023. MiCA covers offerings, transactions and services related to crypto assets (advice and trading, among others), explicitly including exchanges and excluding NFTs8. The UK aimed to regulate stablecoins, thus establishing a much narrower scope than that of the EU9. China banned cryptocurrency exchanges from operating in the country. However, the extent to which this ban is fully enforceable is questionable: VPNs can mask the location of users and bypass firewalls. In fact, China’s customers make up to 8% of FTX’s customers, the same percentage as in the UK.
The regulatory issue refers not only to specific features of the crypto asset market, but also to the lack of thorough auditing and controls in some companies operating in the market, of which FTX has become the prime example. For example, MiCA requires companies that offer custody services for crypto assets to keep a registry of clients and their assets (on an individual basis and up to date). This is to establish internal controls that ensure the assets are kept safe and to separate the companies’ assets from those of the clients. Furthermore, under MiCA, custody providers can be liable if the clients’ assets are lost due to malfunction or hacks10
The fact that, with MiCA, the European Union aims to prohibit insider dealing and market manipulation in cryptoassets markets pretty much clarifies the current Wild-West situation in most exchanges. 
However, despite the efforts of the European Union to align crypto markets with the basic market regulations of other sectors, the reach of regulation might be the most relevant point. This regulation, once approved, will only apply to those entities that issue crypto assets or provide services related to them in the European Union11.  Again, transnational crypto businesses will have incentives to move to lax regulatory environments. 
Moreover, the new legislation on crypto assets is less stringent than that of the traditional financial system (with strict capital requirements and legislation against money laundering, such as the Know-Your-Customer procedures among others). This, could provide incentives for big financial players to move from traditional finance to the less regulated environment, thus increasing exposure to crypto assets.  
Legislation must find a balance between allowing for innovation and avoiding illegal activities, while limiting the possibilities for contagion to the banking sector. 
Regulating crypto assets also legitimizes them. Fostering good corporate governance, internal controls, clear corporate structures and internal and external auditing are key. Investors should be strongly encouraged to perform due diligence before investing in a company. However, the question remains of how to enforce these policies in a market that is by nature transnational. What is the use of all this legislation if citizens cannot be effectively covered by it because companies operate offshore? The most important issue is how to solve this puzzle of fragmented regulation in a global context. 
This is a tough balancing act: each jurisdiction will regulate differentially but the implications will be suffered globally.
(1) Factbox: Top crypto exchanges by volume. (November 9, 2022) Retrieved from:
(2) Oliver, Asgari & Shubber, (November 18, 2022) FTX: inside the crypto exchange that ‘accidentally’ lost $8bn. Retrieved from: 
(3) United States Attorney Announces Charges Against FTX Founder Samuel Bankman-Fried. (December 13, 2022). Retrieved from: 
(4) Oliver, Asgari & Shubber, (November 18, 2022) FTX: inside the crypto exchange that ‘accidentally’ lost $8bn. Retrieved from:
(5) Elder (November 10, 2022). Untangling the knotty empire of Bankman-Fried and FTX. Retrieved from: 
(6) Wang (September 14, 2021) FTX  moves headquarters from Hong Kong to Bahamas.
(7) Wang (September 14, 2021) FTX  moves headquarters from Hong Kong to Bahamas. 
(8) Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937. Article 1. Retrieved from: 
(9) Elderfield (August 31, 2022). A divide has emerged in EU and UK crypto regulation. 
(10) Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937. Article 67. Retrieved from: 
(11) Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937. Article 2. Retrieved from:

IESE-ECGI Conference 2022
Watch all the sessions of the IESE-ECGI Conference 2022 on "Corporate Governance, Corporate Culture and the Board's Culture" that took place at IESE, Barcelona Campus, on October 3, 2022, here.
Corporate Governance Trends and News.
According to PwC’s 2022 Global Investor Survey, investors understand that businesses should prioritize innovation, financial performance and data security and privacy in a context in which the expected main short-term threats that businesses will face are inflation and macroeconomic volatility. 
This survey also focuses on ESG disclosures and finds that investors would give more value and trust to company sustainability disclosures if these were assured at the same level as companies’ financial statements. 
This finding is aligned with the European Corporate Sustainability Reporting Directive that introduces independent auditing and certification of the reporting and disclosures companies will have to prepare under this regulation.
Proxy advisors and large investors have started to issue their proxy voting policy guidelines for the 2023 annual shareholder meetings in which they provide a comprehensive review of its voting policies that reflect their governance concerns.
Even if ESG investing is on the rise, the fragmentation of the current ESG regulatory framework highlights several challenges that need to be addressed so that all market participants have access to relevant, comparable and verifiable ESG data. 
To create a global common language of sustainability related financial disclosures, the International Sustainability Standards Board has agreed to describe the concept of sustainability.
CEOs main concern for 2023 is recession, according to a survey led by The Conference Board to CEOs and other C-suite executives from around the world. The survey also found that CEOs do not expect to reduce focus on ESG matters besides the current economic uncertainties.
CEO succession continues to be a problem for Disney. Activist investor Nelson Peltz plans to start a proxy fight for a seat on Disney’s board this year. 
Read more here

An in depth analysis on the influence of activist investors on corporate governance and strategy can be found during a session held at the 2021 IESE – EGCI Conference on “Activist investors and strategic decision making” with Professor Margarethe Wiersema and Professor Gaizka Ormazabal.
The IESE Center for Corporate Governance participated in the public consultation process on the draft revisions to the G20/OECD Principles of Corporate Governance, to provide additional facts and observations that should be considered for improving the quality of effective governance.
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