As FTX fallout spreads, DAR highlights digital asset exchange diligence assessment factors for institutions
New York, NY – Digital Asset Research (DAR), an industry-leader in cryptocurrency exchange vetting, today announced five best practice areas that institutions should consider when conducting diligence on crypto exchange platforms. Since 2017, DAR has completed quarterly reviews of 450+ crypto exchanges to identify venues that meet institutional standards, with the latest evaluation qualifying 19 Vetted Exchanges and 9 Watchlist Exchanges.
The five best practice areas that should be evaluated when performing crypto exchange diligence include strategic assessments related to the categories of: Regulatory, Governance, Institutional & Financial, Technical, and Data Science.
“In the wake of FTX, we believe the industry needs transparency and diligence to make digital assets a better place by sharing exchange vetting insights we have gathered over the years,“ said Doug Schwenk, DAR’s CEO. “It’s our goal to help more institutions make informed decisions on which exchanges are safe and appropriate to rely on for quality of pricing or other use cases.”
DAR never added FTX to its list of Vetted Exchanges list due to weak controls, including KYC and AML policies, unwillingness to respond to standard confirmatory diligence questions, and an opaque relationship to Alameda, among other factors.
Within these five best practice areas for exchange diligence, some factors DAR recommends evaluating are detailed below.
1. Regulatory Assessment – a review of the regulatory landscape where the exchange is domiciled and operates, including existing regulatory frameworks, licensing or registration requirements based on user locations, and the exchange’s efforts to comply.
2. Governance Assessment – an evaluation of the exchange’s policies across key areas such as KYC/AML, trade surveillance, listing requirements, insider access to information, handling of customer funds, personal trading, and others.
3. Institutional & Financial Assessment – a look at whether the exchange has financial strength through reserves, balance sheet, and insurance, and effectively implements the policies and governance it claims.
4. Technical Assessment – a review of data availability, downtime history, security practices or deficiencies, cold storage custody, and business continuity plans.
5. Data Science Assessment – an in-depth analysis of exchange data to see if there is any evidence in the reported trade and order book data that volume is not actual economic activity between real buyers and sellers, including looking for evidence of wash trading or other non-economic activity.
DAR’s Exchange Vetting Methodology is designed to provide market participants with a transparent view of the objective process followed to evaluate the largest digital asset exchanges by reported volume. This process aims to identify better exchange platforms and encourage best practices, promote transparency, and address concerns of participants entering the space.
The Exchange Vetting methodology is continually reviewed to ensure it meets the needs of the maturing market. DAR regularly engages with global regulators and market participants to discuss the behaviors an exchange must adopt to meet institutional requirements and investor needs.