Any director reading about the collapse of FTX can see the failings of basic governance. From a lack of accountability between management and an independent board, conflicts of interest and a lack of arm’s length transactions by the CEO, let alone rudimentary governance principles of following the bylaws, keeping minutes, proper election of directors and appointments of a CEO to related entities, the list of failures goes on.
In the unregulated, burgeoning financial industry of cryptocurrency, it would certainly seem prudent to have had some of these basic governance principles established, but like in the case of Theranos, high profile people simply looked the other way. Is this merely because of yet another young, charismatic, CEO who everyone just wanted to believe, including celebrities who offered their endorsement in high priced television ads or is there something more to this? Will the unverified belief in unicorns continue or will this begin to be the end of exuberant blindness of obvious flaws in a CEO and a business model? Could it impact the development of blockchain as a technology?
After writing my book Blockchain in the Boardroom in 2018, I cautioned about the importance of governance principles in blockchain initiatives. Much like the internet needed global governance in the early days to become what it is today, Blockchain and cryptocurrencies need the same thing. While many call for government regulation, a good starting point would be back to governance basics.
Many in the blockchain industry have expressed concerns that the FTX collapse is already having negative ramifications to blockchain projects and opportunities, which would be unfortunate because blockchain didn’t really have anything to do with the FTX collapse. Many companies have been developing blockchain initiatives for the last five to ten years often exploring solutions in supply chain, insurance, and other financial transactions beyond just cryptocurrency. Here’s what you need to know about cryptocurrency, blockchain and the FTX collapse in the boardroom:
FTX was an exchange to buy and sell cryptocurrency. It was essentially operating like a bank, but not regulated like one. Blockchain technology has nothing to do with the collapse – it was good old fashioned lack of transparency, oversight and likely fraud. Don’t conflate blockchain with FTX’s collapse. Do recognize the importance of good governance in any company.
Blockchain is a new type of database that has been the foundation for most cryptocurrencies, but not all blockchains are cryptocurrencies.
Most blockchains include some type of smart contract technology that allows for greater efficiencies.
Blockchain is more efficient because it:
Saves time on the transaction because it is authenticated the moment it is entered into the blockchain or database.
Removes costs because fewer middlemen are needed to “clear” or authenticate data sets or take steps in the process of entering it in the database and processing it.
Reduces risk from tampering, cybersecurity or fraud by decentralizing the way it is stored (keep in mind FTX was an exchange, it was not itself a blockchain).
Increases trust through shared record keeping.
A transaction on a blockchain ledger could represent anything:
A credit account that allows you to buy things off of it and replenish that credit.
A piece of property you might sell.
Digital rights to a song, photograph, video, etc. that you want to monetize.
Access to a secure box that has a piece of jewelry you want to sell.
An insurance policy.
Information about your health.
Or your very identity as a whole – everything about you and the ability to transact whatever business you need in a secure manner.
This is what has the potential – it could be used to track anything of value that has an individual owner.
Every time you hear the word blockchain, add the word database or think of an old school ledger and it will all start to make a lot more sense.
Blockchain does not yet have standards and oversight through governance. It will need standards and consistency for companies to leverage it. But, those very standards can also open the door to the same problems we have today.
For blockchain to succeed, governance is essential because governance creates the rule framework by which all of the participants agree how it will operate.
Blockchain is not a relational or connected database. It’s maintained separately and connected by many computers – not unlike our current internet infrastructure.
An important indicator that directors and executives need to understand the impact of this on their business now is that there are thousands of patents publicly posted in the USPTO related to blockchain technology. The company that figures this out and protects it properly will have a clear competitive edge. Those that wait may find themselves boxed out or paying hefty licensing fees to use the new blockchain technology.
In the latter half of the 20th century, centralization became the key to databases amassing enormous power and potential and creating enormous economies of scale. In the decades ahead, we will likely see decentralization (a core component of blockchain) as the emergent form of connectivity to address the problems that have emerged in cybersecurity. We made a lot of really big targets. Now we have to unravel that.
If there's one key takeaway, know that governance will become increasingly important as new technologies like blockchain and cryptocurrency disrupt old rules of business.
If you would like more information or are interested in education sessions on blockchain technology, disruption, cybersecurity, the future of work or other technology related topics in governance, a strategic and facilitated discussion or a 360 review, contact me at jwolfe@consultwolfe.com or 513.238.4348.