Digital Asset Innovation Can Survive Strong Governance and Internal Controls

By Ed Wegener

Wire blockchain with cubes on brown background, CGI.

As the digital asset industry has evolved, Oyster has been keeping an eye on how the regulatory landscape has been developing with it. The spectacular blow-up of the FTX exchange and statements by its new CEO about “…utter failure(s) of corporate controls…” bring into stark view the significant challenges that the industry continues to face in developing its foothold. This industry is known for innovation, speed, flexibility and cool. All are very important to its success. But in financial services, the single most important characteristic is TRUST.

Blockchain technology has created so much potential, but it is impossible to realize that potential when people are concerned that investments could disappear in a wave of scandal and headlines. It is critical that the industry recognize that a well-designed regulatory framework is much more likely to help it meet its objectives. Regulators seem ready to work closely with the industry to develop sensible regulations that do not smother what makes the blockchain so promising. This will take time. In the meantime, digital asset entities should heed the warnings of FTX and develop strong governance and controls that facilitate rather than hamper innovation and flexibility.

What does that mean in practice?

All companies need to have a defined governance framework, regardless of size and complexity. The Corporate Governance Institute defines corporate governance as a set of tools that enables an organization’s management and to run more efficiently and effectively. Governance defines the power structure, accountability structure and decision-making process. It is what makes sure that the actions an organization takes align with its objectives. Governance identifies risks to an organization’s objectives and mitigates them within its risk tolerance. Governance does not need to be complex or bureaucratic to be effective. Many organizations have used their innovation and drive to develop highly efficient and technology-enabled governance.

Strong governance starts with an entity’s Board of Directors. The Board should have a defined structure, and its responsibilities for the planning and oversight of the firm should be spelled out. Similarly, roles and responsibilities of management should be outlined. Accountability for performing key tasks should also be clearly defined. Based on these, a standardized but flexible decision-making process should be developed.

Firms should develop a framework for setting the organization’s risk appetite, reviewing and understanding major risks, and overseeing the risk management processes. Risk management should be carried out through a system of financial, operational and compliance controls designed to mitigate and manage material risks. To help the Board and management assess and oversee the effectiveness of their governance and risk management, key metrics should be identified and monitored. Regular testing should be done to make sure that the firm’s risk management and controls are working as intended. And finally, but importantly, appropriate books and records should be kept demonstrating the firm’s governance and control activities.

Governance and controls should not be seen only as something that only “traditional” or “old-school” companies use. A strong controls framework is important for all entities, and innovation and flexibility should be supported by the framework, not discouraged.

Oyster’s industry experts are seasoned professionals that have hands-on experience developing effective financial, operational and compliance governance and controls. We work with our clients, including those in the digital asset industry, to ensure that the developed frameworks meet their unique business and structure.

About The Author
Photo of Ed Wegener

Ed Wegener

Ed Wegener is an innovative compliance, risk management and supervisory controls expert with deep understanding of Federal Securities Laws and the rules of self-regulatory organizations, as well as technology optimization and risk mitigation. Prior to joining Oyster, Ed held several posts in FINRA, most recently as  Senior VP and Midwest Regional Director.