RISK MANAGEMENT

BEST PRACTICES

What every CEX must do

1- Conservative Capital Structures

Taking on debt to fund growth should be approached with caution

With the past year’s macroeconomic and geopolitical
developments, it has become clear that efficient use of capital
is critical to any company’s success. Even more established,
less volatile sectors than crypto are pivoting towards a more
conservative stance on taking on leverage to fund growth.

The risks are exacerbated the volatile nature of the crypto
assets industry. Companies in the cryptocurrency and digital
assets space are urged to maintain a conservative approach
to their capital structure. The perpetual fluctuation in value of
cryptocurrencies, especially in its nascent days, makes it
extra challenging and generally inadvisable to rely on debt to
fund growth.

2- Properly Collateralized Wrapped Tokens

Wrapped tokens must always be collateralized 1:1 on their native chain

Wrapped tokens offer a great interoperability solution
allowing users to seamlessly move assets and make use of
applications, projects, and opportunities on other
blockchains.

This brings various benefits such as faster transaction times,
lower gas and other fees, yield farming opportunities, and
other use cases.

To ensure value stability, wrapped tokens must always be
collateralized 1:1 on their native chain, with the collateral
clearly set aside in a manner verifiable the community

3- Token Listing Requirements

Maintain high standards for admission of assets into trading

Centralized exchanges have a critical responsibility to
implement a strict governance process for admitting crypto
assets to trading on their platforms. A stringent due diligence
process and strict listing requirements must be self-imposed
all centralized exchanges to protect their users from
projects with low credibility and high risk.

4- User Protection Funds

User Protection Funds: Exchanges should establish a reserve
to act as a safety net to protect users in the event of data
security threats.

Some best practicesn
A periodic review of the fund’s total value must be
conducted, and top-ups might be necessary to maintain a
reasonable level of coverage during market downturnsI
The fund assets must be safekept such that they are not
compromised in the same manner in the unfortunate event
that the CEX’s funds were subject to a security breach.

Industry Recovery Funds:

CEX’s should consider participating in industry wide efforts to
support high potential projects in the digital assets and Web3
space that could be facing funding difficulties during broader
market downturns.

5- Education

Education is the best form of consumer protection. Spreading
financial literacy for crypto assets and making blockchain
education accessible is key to mass adoption.

All exchanges must dedicate the necessary resources to
provide their users with sufficient knowledge about their
products and services to choose the products, services, and
vendors that cater to their needs. Providing the right level of
knowledge and investing in user education is pivotal to the
future of the whole industry.