The importance of asking questions (and governance)

Following the collapse of FTX and the abandonment of ASX’s proposed CHESS replacement plans, Virginie O’Shea looks at how we need to get better at casting a critical eye over projects.

I think the last few weeks in digital assets and blockchain are testament to the fact that the industry hasn’t been asking the right questions or, in other words, conducting the right level of due diligence on some of the investments (internal and external) that have been made over the last few years.

First, we witnessed one of the largest frauds we have seen happen in the crypto-asset space to date come to light and act as a catalyst for other bankruptcies and financial woes across the sector. Then, arguably, the most high-profile of blockchain projects was canned, after a significant amount of time and money was spent on it over the course of the last decade. How did we get here? What do these two examples of financial loss have in common? Not enough questions were being asked by the right people at the start of the investment or throughout.

We can all get swept up in enthusiasm about a new concept or technology, but proper governance is fundamental to success in both investment strategy and technology change. A number of hard questions need to be asked early on in an investment cycle and then repeated further down the line to ensure that things are being assessed adequately from a risk, cost and success perspective.

We are, after all, in the business of directly making investments or supporting the buy-side to make investments for end investors. You know, those pesky pensioners that need something to live on when they retire, or those investors saving for the future of their children. Our investments should take into account their long-term needs and the needs of our direct clients, and not focus on short term profitability or innovation theatre.

There are more than enough column inches devoted to FTX at the moment, so I’ll refrain from talking about that particular example of fraud in detail. But I’ll ask what many of us may be thinking, what on earth were so many reputable investors doing? Relying on data from an auditor that no one had heard of and that conducted assessments in the metaverse? One institutional investor has publicly stated that it was forced to remain “open-minded” about its investments into crypto because of the newness of the sector. Open minded doesn’t mean abdicating responsibility for proper governance or due diligence.

Or, in the other case example, if you’re the unfortunate team or individual in charge of a huge project that is floundering, knowing when to call time is reliant on you keeping a close eye on all of the components underlying that project. This includes scalability, which is somewhat important if you are an equities market infrastructure. And that means asking questions, challenging partners, taking a reputational hit early on if needs be. Not every project can be a success, but carrying on regardless of the indicators and the feedback is inadvisable, to say the least.

The two examples are not equitable at all, don’t misunderstand my point, the similarity merely lies in the seeming dearth of questions being asked early enough on to make a difference. We need to get better at casting a critical eye over our projects, even if they are in completely new spaces and using new technology. And, if no one is asking you those questions, hire someone who will.