【特集】Founder Risk: The Elephant in the Room in the Crypto Industry

The Problem of Founder Risk

In the crypto industry, much attention has been given to regulatory risk as the main threat to the sector. However, another significant risk that needs to be addressed is founder risk. Several prominent platforms have suffered implosions, resulting in the loss of billions of dollars in client capital. While regulatory clarity is often called into question, the lack of industry standards around asset custody is a major contributing factor to these failures.

The Issue of Asset Custody

Unlike traditional markets, the digital asset and Web3 market lacks industry standards for asset custody. In traditional markets, assets are typically held by third-party custodians, separate from the platform where they are traded. This avoids conflicts of interest and reduces the risk of asset vaporization. However, in the crypto industry, centralized exchanges and brokers often hold the assets that users trade, leading to potential mishandling or misuse of client assets.

The Flaws of Centralized Exchanges

Centralized exchanges operate with a setup where users transfer their assets to the custody of the exchange. However, these assets are co-mingled with those of other traders, and there are no segregated accounts. Users authorize the platform to move their assets, but this arrangement poses significant risks. In the event of bankruptcy, users are often treated as unsecured creditors, leading to minimal returns on their investments. Moreover, users have limited visibility and control over their assets, allowing exchanges to potentially abuse their trust.

A Solution: KYC'd/AML'd Self-Ownership

While some advocate for self-custody as the solution, it is not practical for most users who lack technical knowledge or desire to manage their own wallets and seed phrases. Instead, a middle-ground solution is proposed. Users would undergo KYC/AML compliance onboarding and hold their assets in a non-custodial wallet that can seamlessly interact with exchanges. This enables user control while avoiding the risks associated with centralized custody. Furthermore, it ensures compliance with regulatory requirements and provides a mechanism for key recovery in case of seed phrase loss.

The Path Forward

To achieve mass adoption of decentralized assets, the industry needs to bridge the gap between Web 2 platforms and Web3. This transition requires a nuanced approach that balances user protection and founder risk mitigation. The industry must work towards standardized asset custody practices and prioritize user trust. By meeting users in the middle and gradually introducing them to decentralized ownership, the industry can foster a sustainable and trustworthy environment for Web3 platforms to thrive.