Abstract
This chapter explores the evolving landscape of fraud in the cryptocurrency industry, emphasizing the vital role of corporate governance in addressing this challenge. Several companies are involved in crypto frauds schemes such as Ponzi schemes, rug pulls, pump and dump, and exit scams. This chapter studies FTX's dramatic downfall from a $32 billion valuation to bankruptcy and will illustrates the broader issues within the startup culture, such as enabling misconduct, lack of accountability, immature governance, and distorting trust of stakeholders. This study presents recommendations for combating cryptocurrency fraud and improving corporate governance, including strengthening regulations and promoting transparency. The chapter also suggests implementing a corporate governance maturity model (CGMM) to effectively combat fraud, outlining its potential benefits. This study can be beneficial to the regulators, policy setting bodies, and financial institutions where they can implement the CGMM and foster the environment of transparency and accountability.
TopIntroduction
Fraud is considered as the breach of trust (Cumming, Hornuf, Karami, & Schweizer, 2021). Fraud exists in our society even when there were no standards, official rules and regulating bodies (Sood & Bhushan, 2020). Over the time, the fraud is changing its features and characteristics, but the major component is the same i.e. fraudster first develops the trust and then breaches it for the purpose of personal gain (Vousinas, 2019).
Keeping the three scenarios of fraud triangle, all fraudsters meet similar traits namely opportunity, motivation and pressure (Sánchez-Aguayo, Urquiza-Aguiar, & Estrada-Jiménez, 2021). Opportunity provides fraudsters to commit fraud. Not all the people in the organization have the opportunity to invest, approve and pay; therefore, only those who have authority have the opportunity to commit fraud (Elisabeth & Simanjuntak, 2021). Similarly, motivation and pressure to conduct fraud can be developed in any point in time and in anyone within organization; however, when pressure is coupled with motivation and person has the opportunity then fraud chances of fraud increases (Fitri, Syukur, & Justisa, 2019; Hudayati, Nisa, & Sanusi, 2022). It is important for organizations to implement strong internal controls and fraud prevention measures to mitigate this risk.
Similar to fraud, startups are not the new concept. The concept of startups started in the 1930s, but the term itself was not coined until then (Euchner, 2019). The startup movement really took off in the 1980s and 1990s (Feld, 2020) and has continued to grow in recent years. In the current business environment, the startup movement has experienced a resurgence. This is due in part to the rise of new technologies, such as cloud computing and mobile devices. These technologies have made it easier for startups to launch and grow their businesses (Sami, et al., 2020). Table 1 demonstrates the few startups in last five years that were considered successful:
Table 1. | Year of Startup | Initial Investment | Name of Company | Current Worth as of 2023 | Brief Business Description | Source |
| 2010 | $500,000 | Stripe | $95 billion | Financial services and software | (Konrad, 2022) |
| 2012 | $200,000 | Instacart | $39 billion | Grocery delivery company | (Saba, 2023) |
| 2013 | $400,000 | Doordash | $35 billion | Food delivery company | (MacroTrends, 2023) |
| 2008 | $25,000 | Airbnb | $78 billion | Home-sharing company | (MarketCap, 2023) |
| 2012 | $1 million | ByteDance | $220 billion | Chinese technology company that owns TikTok, Douyin, and other popular video-sharing apps | (Post, 2023) |
| 2009 | $7 million | Rivian Automotive | $16 billion | Electric vehicle manufacturer | (StockAnalysis, 2023) |
Key Terms in this Chapter
FTX Trading Limited: Startup company for cryptocurrency exchange founded in 2019 by Sam Bankman-Fried and Gary Wang. FTX trading company filed for bankruptcy protection in the United States on November 11, 2022.
Cryptocurrency: Virtual or digital currency not backed by gold or commodity. It is difficult to counterfeit due to its digital footprints.
Governance Failure: Term used to define that poor and or noncorporate governance exist which ended up in the closure of organization or wiping out the entire capital of organization.
Corporate Governance: Set of rules, regulations, policies and principles which guides organization for the achievement of its mission and vision and at the same time protect its shareholders.
Corporate Governance Maturity: Defines how mature is the corporate governance. It ensures that corporate governance is not utilized as compliance check box.
Fraud: Is the intentional act of deceit which is conducted by a person or organization for its personal gain.
Startups: Are the unique products or business models which are introduced in the market. Startups are usually funded by venture capital or by crowd fundings.