Before it filed for bankruptcy last November, many of the entities in Sam Bankman-Fried’s colossal FTX empire had never held a board meeting. The crypto exchange operator itself, once valued at $32 billion with $1.8 billion in venture capital raised, only established a board near the end of its life with three directors.

Its sister trading house Alameda Research, which allegedly received unfettered access to FTX customer assets to fund its bets, had such poor recordkeeping that Bankman-Fried told staff members its books were “unauditable,” according to communications published by the group’s new management. Occasionally the firm would find $50 million in assets “lying around that we lost track of,” Bankman-Fried said. Now the former CEO stands accused of fraud, money laundering and bribing Chinese officials — among other charges — while investors and customers are left nursing billions of dollars in losses.

The lack of effective corporate governance and due diligence conducted on FTX’s books raised eyebrows around the world. But for crypto industry watchers, it’s not an unfamiliar tale.

Bloomberg News surveyed 60 major crypto companies in the first quarter — spanning the breadth of exchanges, mining companies, analytics businesses and token issuers — to gauge the state of governance and controls in the sector.(1)Many of these companies, which include the likes of Binance, Coinbase Global Inc., Tether and OpenSea, oversee the flow of tens of billions of dollars in assets daily. And while a fair number do adhere to traditional standards, many operate outside the norm.

• Read more: Coinbase Is Facing an ‘Existential Risk’ as SEC Reins In Crypto

Each received the same set of questions, aimed at measuring what share of crypto’s upper echelon employs a third-party auditor and has an independent board. More than half of the firms provided full or partial responses, while 17 declined to participate and eight didn’t respond at all. For some that declined, such information was publicly available.

“It’s an industry of anonymity that’s masquerading as transparency”

Around half of the businesses surveyed currently engage an independent auditor to assess their finances, the findings showed. Meanwhile, 63% of the companies had an independent board of directors – meaning that they had at least one non-executive member. Nearly all of the 60 firms surveyed have raised outside investment since their founding, according to PitchBook or other publicly available information.

Both audits and independent boards are basic standards that any investor would expect a company to have in place, particularly if that firm is of a certain size and working in a financial sector, said Ruth Foxe Blader, a partner at digital financial-services venture capital firm Anthemis. But when it comes to crypto — a sector whose technology promises openness and indelible record-keeping — the industry as a whole has fallen short on such accountability.

“It’s an industry of anonymity that’s masquerading as transparency,” Ruth Foxe Blader, a partner at digital financial-services venture capital firm Anthemis, said in an interview.

Shifting Investor Expectations

Crypto is a young industry: Only a handful of the 60 firms are publicly traded and beholden to certain regulatory standards. Disclosure requirements can differ globally, and a lack of openness does not necessarily mean that there is something to hide. But the recent wave of crypto scandals, alongside a broader slump in venture capital investments, has raised the stakes.

Some investors are becoming more demanding and vigilant as a result. Regulators are also concerned, with a recent proposal by New York state’s attorney general suggesting that crypto exchanges be required to seek independent public audits.

• Read more: New York AG Proposes Landmark Crypto Law, Citing ‘Dysfunction’

While it’s typical for a startup to have only its founders on the board during a seed investment, it should have at least one outside director by its Series A round, said David Pakman, managing partner at crypto VC firm CoinFund.

“That’s our expectation going in now,” he said, noting that crypto investors are increasingly aligning their expectations with the standards they require for traditional tech venture funding. For tech companies in the later stages of growth, board approval is required for expenses above a certain level, he added, another expectation “that’s also coming into crypto.”

Auditing Pains

Audits have become a hot-button topic for the crypto sector in recent years. While startups could be valued highly by investors without necessarily bringing in enough revenue to require a financial review, investors generally would expect an audit once a business reaches around $20 million in annual revenue, according to Balderton Capital’s General Partner Rana Yared.

Many crypto companies have said that major auditing firms are reluctant to engage with them, due in part to a perceived lack of experience with blockchain accounting and the crypto industry’s history of scams and scandals. Several firms, including crypto exchanges Binance and Bitfinex, said in their responses that Big Four accounting firms were either unwilling or unequipped to work with digital-asset companies like theirs.

The survey findings show that around 46% of the 24 firms that disclosed information about their present auditor said their full financial audits were completed by a Big Four accountant. Coinbase, Circle and Ripple said they received annual audits from Deloitte, while EY was named as an auditor by Chainalysis, Ledger and Anchorage Digital. Most companies had also been receiving ongoing external checks on their finances for at least three years.

Some audit firms have grown wary of working with the industry. French-headquartered Mazars Group, which previously provided reports that vouched for assets held in reserve by exchanges Binance and Crypto.com, halted all such work in December citing “concerns regarding the way these reports are understood by the public.” Both Binance and Crypto.com have since engaged new auditors, according to spokespeople for the companies, who declined to disclose which ones.

• Read more: Accountant That Vetted Binance Reserves Halts Crypto Work

Empty Boardrooms

Without the extensive regulatory framework that’s present in other areas of finance, investors and experts said there’s little impetus for some crypto firms to get up to speed.

Listed companies are required to have a board of directors as a condition of trading in destinations such as the US, the UK and the European Union, but startups will often form boards prior to that point because venture capital backers typically request a seat as a condition of investment.

While 38 of the crypto companies polled had a board with at least one non-executive member, the findings showed 10 companies didn’t, while 12 either didn’t respond to that question or the information was not available in public filings. Among those without independent boards were Tether, Huobi and Magic Eden, whose boards were either only advisory or entirely staffed by company executives.

Binance will likely have a formal board in place to oversee its parent group by the end of this year as it seeks registrations with regulators across the world, the exchange’s chief compliance officer Noah Perlman said in an interview.

Not all firms in crypto are those that handle customers’ money, however, softening the impetus for stronger corporate governance from the get-go. Some companies said they had a board but declined to confirm information on its members, such as Crypto.com, Kraken, Uniswap Labs and OpenSea.

There’s also no guarantee that having a board can help avoid corporate delinquency, Foxe Blader and Yared said, with both the technology and financial industries playing host to their own corporate blowups.

With regulation in the works across the globe, corporate governance is likely to be high on the agenda. Proposed rules in the UK will require crypto firms to meet the same standards as the rest of financial services, while the EU’s Markets in Cryptoassets directive also plans to oversee governance inside crypto companies operating within the bloc.

“Clearly having some independent non-executives is a good idea, it’s best practice,” said John Salmon, head of law firm Hogan Lovells’s digital assets and blockchain practice. “But ultimately, companies will only really grasp the nettle when there’s regulation telling them they must do it.”

--With assistance from Hannah Miller, Muyao Shen, David Pan and Suvashree Ghosh.

(1) Methodology: Companies selected to be included in the study met one or more of the following criteria: They are publicly listed, were valued at over $1 billion in private fundraising or were considered to hold significant influence in the sector as of January 2023. Each firm was asked the same set of questions and received multiple requests to participate or confirm public information between January and May 2023. Data includes information collected on Silvergate Capital Corp. prior to the bank's closure.