Alex Hoffman

My journey into the world of cryptocurrency began with a touch of serendipity back in 2011 when I experimented with bitcoin mining on my MacBook.



However, it wasn’t until much later that my interest in crypto really took off. My first project, Nirvana, was inspired by the DeFi craze, particularly Olympus DAO. My team saw real potential in refining its model to make it safer and more appealing to investors.



Unfortunately, during the week of our audit process, we were breached by a bad actor —&nbsp;a rogue security engineer named Shakeeb Ahmed, as we would later find out. Ahmed returned the funds and was just <a href="https://blockworks.co/news/nirvana-hacker-pleads-guilty">sentenced to three years in prison</a>, but it was a living hell to get there.



The incident shook not only our team, but the entire community. However, even after the harrowing experience of the hack itself and the years-long process to get justice, I’ve still chosen to remain in crypto.&nbsp;



The material outcome for me, both personally and professionally, was a testament to the power of collaboration, perseverance and justice. Despite the hardships and the seedier side of crypto that my first project was subjected to, I’m choosing to stay in this industry and try to make an impact.



<h2 class="wp-block-heading">A $3.5 million hack —&nbsp;and its resolution</h2>



As the saga unfolded, the importance of unity and transparency in the crypto community became increasingly evident.&nbsp;



Through collective efforts and unwavering resolve, we not only unraveled the complexities of the hack, but also paved the way for justice to prevail. While the scars of the ordeal may linger, the resilience of the DeFi community serves as a beacon of hope, reaffirming my commitment to innovation tempered by vigilance.



The journey towards resolution began with outreach. Following the hack, we proactively sought guidance from other projects who had faced similar challenges. Among others, Crema and Beansprout shared invaluable advice on how to navigate the aftermath. Through Crema&#8217;s suggestion, we connected with TRM, a renowned entity in the cybersecurity realm. Our efforts saw numerous obstacles. Despite exhaustive investigations, we hit dead ends and were often confronted by the complexities of international jurisdictions.



Read more from our opinion section: <a href="https://blockworks.co/news/censorship-digital-communities-decentralization">It’s time to take back our digital communities</a>



Amidst the frustration, a ray of hope emerged. In October 2023, a Homeland Security Investigator reached out, offering the prospect of cooperation in an ongoing investigation. Eager to contribute, we shared every pertinent detail, including insights gleaned from our interactions with the hacker. This collaboration bore fruit when HSI divulged information regarding the other protocol involved in the hack, further intertwining our narratives.



The path to justice, however, proved arduous. But our cooperation further strengthened SDNY’s case, making them able to pursue precedent-setting legal action against the perpetrator that would determine that “code is not law.”&nbsp;And in the end, after months of meticulous exchanges with HSI, IRS investigators and SDNY, law enforcement was able to identify the hacker.



<h2 class="wp-block-heading">Where the journey has taken me</h2>



Growing up in various cities across the Northeast, I’ve always felt a sense of wanderlust. My journey through life, in both the USA and in my time overseas in Bali and Thailand, has kept one thing consistent —&nbsp;my passion for entrepreneurship.&nbsp;



My conviction that I needed to grow the crypto space wasn’t dimmed after the Nirvana hack: In fact, the hack just triple-reinforced my conviction that this industry was where I needed to take my career. Post-hack, I reflected daily on the paramount importance of asset safety and risk management in the crypto space. For obvious reasons, I was purpose-driven by this above all. Much introspection, meditation and ideation on this led to the inception of a current venture, one focused on revolutionizing risk management in DeFi.



As I continue on this journey, I&#8217;m reminded of the resilience and adaptability inherent in the entrepreneurial spirit. Each challenge is an opportunity for growth, and every setback is a chance to emerge stronger.&nbsp;



In the realm of DeFi, collaboration is not merely a choice but a necessity — a testament to our shared responsibility in safeguarding the integrity of the ecosystem. As we navigate the ever-evolving landscape of DeFi, let the lessons learned from the Nirvana Finance protocol hack serve as a testament to not only the indomitable spirit of innovation, resilience and cooperation — but to the fact that we need to bring risk down in crypto in every way.&nbsp;



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Alex Hoffman is Head of Ecosystem at Superposition Finance. Superposition is revolutionizing DeFi by addressing its core challenges through robust risk management powered by Concordia’s best-in-class risk engine, omnichain functionality, and transparency.</div>


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cryptocurrency

DeFi is the future (and a hack can’t convince me otherwise)

Katherine Ross

The Office of the Inspector General of the Federal Deposit Insurance Corporation released a report on the FDIC’s crypto risk strategies Wednesday.&nbsp;



The Office of the Inspector General made two recommendations to the FDIC, including a process for supervising crypto activities at regulated institutions.



According to a press release, the OIG made the recommendations “based on evidence obtained during [their] evaluation.” It said “the FDIC’s lack of clear procedures causes uncertainty for supervised institutions in determining the appropriate actions to take.”



The OIG <a href="https://www.fdicoig.gov/news/summary-announcements/fdic-strategies-related-crypto-asset-risks">recommends</a> that the FDIC needs to assess the potential risks of crypto because, without “effective guidance,” the FDIC or the institutions under its umbrella “may not take appropriate actions to address the most significant risks posed by crypto assets.”



“Specifically, the <a href="https://blockworks.co/tag/fdic">FDIC</a> has not yet completed a risk assessment to determine whether the Agency can sufficiently address crypto asset-related risks through actions such as issuing guidance to supervised institutions,” the report said.



Further, the OIG warned that a lack of review process could make it seem as though the supervisory body is not being “supportive” of institutions currently engaging or planning to engage with crypto.



The FDIC agreed with the report’s recommendations and “plans to complete corrective actions for these recommendations” by the end of January.



The report also calls out crypto companies making “misrepresentations” about deposits being backed by the FDIC. As an example, it referred to an unnamed crypto company.



“In 2022, a cryptocurrency company filed for <a href="https://blockworks.co/tag/bankruptcy">bankruptcy</a>. This company had been misrepresenting to its customers for over a year that the funds it held for customers were insured by the FDIC,” the report said.



While there were a number of crypto companies that declared bankruptcy in 2022, the Federal Trade Commission <a href="https://blockworks.co/news/ftc-cftc-sues-voyager-stephen-ehrlich">most recently targeted bankrupt lender Voyager</a> for its deceptive claims around FDIC insurance.&nbsp;



The company was allegedly “well aware” that the deposits were not backed by the FDIC, according to a FTC suit.



Additionally, Binance <a href="https://blockworks.co/news/binance-terms-of-service">updated its terms of service to say that accounts</a> are “not eligible” for insurance protections after it said — in an email to customers and seen by Blockworks — that it had been given “guidance” by the FDIC.



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FDIC

FDIC lacks ‘clear procedures’ for crypto-related risks, report says

Sebastian Sinclair

In an effort to navigate the increasingly complex regulatory landscape of the digital asset market, EY announced Monday the rollout of the fourth generation of its EY blockchain analytics tool.&nbsp;



Fidelity Digital Assets, a branch of Fidelity Investments, has become the first enterprise client to leverage the tech, available via EY Blockchain&#8217;s Software as a service platform.



The web-based analytics tool, used by the company’s audit team since 2018, is designed to assist organizations in internal risk management by offering third-party on-chain data queries and wallet address derivations.



Reconciler currently supports a range of blockchains, including <a href="https://blockworks.co/tag/bitcoin">Bitcoin</a>, <a href="https://blockworks.co/tag/litecoin">Litecoin</a>, Bitcoin Cash, <a href="https://blockworks.co/tag/ethereum">Ethereum</a>, and Ethereum Classic. Additionally, it provides support for various ERC-20 tokens such as BAT, DAI, MKR, KNC, ZRX, LINK, CV, and MANA.



EY is positioning the move as an advancement in risk management for digital asset platforms and comes amid a <a href="https://blockworks.co/news/compliance-key-for-exchanges">backdrop of increasing regulatory scrutiny</a> and <a href="https://blockworks.co/news/crypto-skeptics-were-right">skepticism about the security and transparency</a> of the crypto industry.



Read more: <a href="https://blockworks.co/news/privacy-public-transparency-dex">Privacy and public transparency: Can a DEX provide both?</a>



EY’s suit of blockchain tools, which has gone through various iterations over its six-year history, plans to add further support for additional blockchains “based on client demand.”&nbsp;



Support for <a href="https://support.blockchain.com/hc/en-us/articles/9012572718108-What-is-xPub-and-how-do-I-get-it-#:~:text=An%20xPub%20(Extended%20Public%20Key,addresses%20without%20sharing%20private%20keys.">xpub</a> address derivation, block explorers and staking analytics will also be made available sometime in the future, EY said.



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Fidelity Digital Assets

EY’s blockchain tool courts Fidelity amid crypto market skepticism

The International Monetary Fund (IMF) released a working paper last week seeking to tackle the rapidly changing crypto market and highlight significant macro-financial risks they believe have yet to be fully addressed.



The “Assessing Macrofinancial Risks from Crypto Assets” paper points out the crypto industry is becoming an increasingly integral part of the global financial system, essentially operating as a parallel, unregulated financial system.&nbsp;



This brings about considerable systemic risks that the traditional financial sector cannot afford to overlook, the IMF said in its <a href="https://www.imf.org/en/Publications/WP/Issues/2023/09/30/Assessing-Macrofinancial-Risks-from-Crypto-Assets-539473">paper</a> released on Friday.



In a bid to meet that challenge, the IMF is proposing a new tool — the Crypto Risk Assessment Matrix (C-RAM) — aimed at monitoring and assessing those perceived emerging risks both nationally and globally.



One of the most pressing challenges identified is the absence of centralized data and regulatory oversight, which calls for immediate international cooperation.&nbsp;



The IMF also urges that given the fast-paced innovation and the decentralized nature of the crypto market, existing policy frameworks are inadequate for effective risk management.



A need to expand current macroprudential policies to include crypto and decentralized finance considerations is required to shore up concerns surrounding their risk profile, the IMF said.&nbsp;



Read more: <a href="https://blockworks.co/news/g20-imf-fsb-guidelines-crypto">G20 nations endorse IMF and FSB guidelines for crypto regulation</a>



It also suggests that this expansion should be in concert with other macroeconomic policies to build a comprehensive risk management strategy.



Based in Washington DC and consisting of 190 member countries, the IMF positions itself as an entity promoting global economic stability and growth. It achieves this through financial support, policy guidance, surveillance, technical aid, research and capacity building. It often serves as a forum for international financial cooperation.



Its paper last week also took aim at countries that have mandated bitcoin as legal tender to co-exist alongside their national currencies, including El Salvador and the Central African Republic.



“These legal changes could quickly increase the adoption and exposures of highly volatile crypto assets, amplifying the many above mentioned risks,” it said.



El Salvador adopted bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) as legal tender in November 2021, becoming the first nation to do so. Four months later the <a href="https://blockworks.co/news/imf-asks-el-salvador-to-remove-bitcoins-legal-tender-status">IMF urged the Latin American country to ditch those efforts</a>, citing systemic financial risks it poses to the wider community.



The IMF plans to update its conceptual framework as more data and country-specific analyses become available. It will aim for a coordinated international effort to curtail the potential “macro-financial risks” from the crypto sector, it said.



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IMF calls for greater oversight on crypto, proposes new risk assessment matrix

Michael Bodley

Properly measuring counterparty risk in crypto has rarely been more crucial.&nbsp;



This is the clear message emanating from a panel at the iConnections Global Alts conference in Miami on Tuesday featuring executives from Anchorage Digital, Bitgo, Coinbase and One River Digital.



Participants tapped the intended topic, the “evolution” of crypto custody, as a springboard to dive into all things due diligence in a post-FTX digital assets landscape.



Especially with <a href="https://blockworks.co/news/stablecoin-regulation-congress-priority">heightened US regulatory scrutiny on the horizon</a>.



Sarah Schroeder, a One River portfolio manager, said that “ultimately, this is a counterparties question.” She drew a parallel to Wall Street’s practices for safeguarding customer assets, including cash and derivatives. It’s “very easy” for institutional investors to “call upon Goldman Sachs” and its peers for that crucial function, she said.



But how cryptoassets are custodied is another question entirely for newcomer traders and allocators — with passive and active approaches alike — to wrap their heads around. How? By whom? And why?



There is no shortage of mechanisms these days, some more complex than others, for keeping digital assets under lock and key. There are more solutions being added by the day — especially after the historic implosion of Sam Bankman-Fried’s <a href="https://blockworks.co/tag/ftx">FTX</a>, plus the subsequent shutdowns and deep rooted complications for a number of crypto’s erstwhile giants.&nbsp;



Some of those custodial offerings, according to Adam Sporn, BitGo’s head of prime brokerage, have been around since crypto’s last major cycle. Some are still very much a moving target.&nbsp;



Drawing particular institutional interest of late from the likes of venture capitalist and family offices, Sporn said, are cold storage solutions. Cold storage works by keeping the private keys that <a href="https://blockworks.co/news/what-are-seed-phrases">govern ownership of digital assets</a> offline, as opposed to a “hot wallet” that is connected to the internet and may be hosted by an exchange.



READ MORE: <a href="https://blockworks.co/news/hot-wallets-cold-wallets">Everything you need to know about hot vs. cold wallets</a>



<h2 class="wp-block-heading">Rush for exchange exits</h2>



Both retail and institutional investors alike yanked their crypto assets off of exchanges in the wake of the wave of service provider bankruptcies and <a href="https://blockworks.co/news/genesis-gemini-charged-with-securities-violations-by-sec">related freezes on customer withdrawals</a>.&nbsp;



It’s been a bit of a slog for outright custodians to regain trust in markets that were already deemed risky by much of the mainstream.



BitGo, according to Sporn, has picked up on a trend: Crypto-native funds “don’t care about the cold storage” and instead have been using hot wallets as much as ever. High-frequency digital asset hedge funds and proprietary trading entities typically have little use for storing their cryptocurrencies offline.&nbsp;



But other portfolio managers with less time-sensitive trading styles have been carving out a middle ground, Sporn said, keeping something like 2% of their book in hot wallets for ‘liquidity needs” and locking up the remainder elsewhere.&nbsp;



Neither trend is especially new when it comes to family offices and venture capitalists. But industry eyes and ears have been following the money — and, more precisely, how the money moves — since crypto markets collapsed in the fourth quarter of 2022.&nbsp;



<h2 class="wp-block-heading">What to do about custody?</h2>



In that (brutal) context, industry participants are now looking for options when it comes to the digital asset products at their disposal, according to Yuriy Anosov, Anchorage’s head of trading. The longtime custodian is working on setting up a settlement and exchange layer similar to setups that have been commonplace on Wall Street for a while, Anosov said.



Anchorage is now supporting a couple of hundred cryptoassets, according to Anosov — adding that it’s now “really important to see what the inter-party agreements are like.” Anosov was referring to relationships between a protocol, or a DAO, and its own counterparties.&nbsp;



The basic idea is that limited partners and general partners ought to do their homework on the service providers they choose to entrust with their capital. And, in turn, those service providers ought to carefully parse the internal governance of cryptocurrencies and Web3 initiatives they choose to bring onto their platforms.



Those dual layers of due diligence have become paramount, according to Lauren Abendschein, Coinbase’s head of institutional sales for the Americas.&nbsp;&nbsp;



“We saw this with FTX, not having properly experienced individuals, particularly in control functions — and a well-documented history across those control functions,” Abendschein said. “It applies to crypto very much, as it does every other industry.”&nbsp;



The SEC and the CFTC have taken note. Anosov said that he thinks “regulators are actually going to be speeding up their timeline in the case of actually [moving] regulations forward” in 2023.



There are a number of pending US legal and regulatory initiatives the panelists said they’re following. Among them: <a href="https://blockworks.co/news/these-5-crypto-friendly-us-states-show-initiative-on-tax-laws">digital asset taxation</a> and <a href="https://blockworks.co/news/stablecoin-regulation-congress-priority">stablecoin oversight</a>.



Jiri Krol, a top AIMA executive who moderated the iConnections conversation, said that “hopefully we get something done this year, but I’m not holding my breath.”



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crypto custody

Regulators May Be ‘Speeding Up Their Timeline’ on Cryptocurrencies

John Morrow

<div id="highlights-block_631f5dae6cd98" class="highlights">
 <ul>
 <li>Transparency that comes with public code review is useful, but the history of Defi exploits shows it doesn’t solve the problem</li>
 <li>A new payment structure will better align Gauntlet’s incentives to the DAOs they serve</li>
 </ul>
 
</div>



It’s truly exciting that changing one line of solidity code — the language of Ethereum smart contracts — can create an entirely new financial product.



But how can we understand whether these new instruments work as intended? The risks are poorly understood, and the scale of losses <a href="https://cms.blockworks.co/?s=exploit" target="_blank" rel="noreferrer noopener">is staggering</a> — the system is broken! We can improve, if not fix, this with better incentive alignment — putting our money where our mouth is.



Professional code audits and the transparency that comes with using only open source code are not enough — we’ve seen protocols that suffer losses even though they have undergone three audits!



DAOs have been formed around new protocols that allow them to incentivize and coordinate contribution. Protocol DAOs need to address the risks their products create — token holders are often left holding the bag when things go awry, and one solution we’re optimistic about is based on a simple guiding principle.



<h3 class="wp-block-heading">If you are wrong, you don’t get paid</h3>



If users get rugged by a protocol hack, auditors should too. If the market tanks and a protocol becomes insolvent, the risk manager shouldn&#8217;t get paid either.



In this spirit, we will move all Gauntlet engagements to a new payment structure where we are held accountable for the quality of this service.



How?



Service fees will be held in an escrow contract until it’s crystal clear that the work was successful.



A strong ecosystem of independent organizations contributing to protocol development and operation is essential to a successful decentralized protocol. Since the proliferation of DAOs in 2020 and 2021, we have seen a few core services emerge:



<ol class="wp-block-list"><li>Protocol development (e.g. Comp Labs, BGD)</li><li>Risk Management (e.g. Gauntlet, BlockAnalitica)</li><li>Smart Contract Auditing</li></ol>



Add to that services such as tooling and analytics (e.g. Chaos, Flipside). While these service providers have taken the first step into the new decentralized economy by working with DAOs, the structure of these engagements has lacked innovation.



One exception here is Bored Ghost Development, which <a href="https://governance.aave.com/t/aave-bored-ghosts-developing-bgd/7527" target="_blank" rel="noreferrer noopener">tied their payment terms</a> to achieving their development roadmap.



<h3 class="wp-block-heading">Compound innovation</h3>



We’d like to see more initiatives that link the fate of service providers to the success of protocols.&nbsp;



As a first step, we recently posted our<a href="https://www.comp.xyz/t/gauntlet-compound-renewal/3541" target="_blank" rel="noreferrer noopener"> proposal to renew</a> our service agreement with Compound and added a clause around the concept of a “first tranche insolvency refund.”



There remain many details to figure out as we move forward, but let us be clear — this isn’t a protocol-funded backstop like the<a href="https://docs.aave.com/developers/v/1.0/developing-on-aave/the-protocol/safety-module-stkaave" target="_blank" rel="noreferrer noopener"> stkAAVE pool</a>, which is intended to maintain protocol solvency.



Instead, what it means is simply that 30% of the contract will be put up against our work. It’s an idea to provide true alignment with our customers, to hold ourselves accountable for what matters to them — driving growth at safe risk levels.



Governance allows the community to weigh in on every change we make, and if the community wants to take on more risk than we propose, they can, but they would forfeit this alignment.



<h3 class="wp-block-heading">Traders and degens at heart</h3>



Many of us came from quantitative trading. We dream of markets and live for risk. At trading firms, your compensation is almost entirely variable, and we’re applying this ethos to our work in crypto.



Merely aligning incentives via escrow barely scratches the surface of how we could leverage this incredible technology not just to decentralize finance, but innovate on it as well.



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DAOs

Contributors Need To Be More Accountable to the DAOs They Serve

Jack Kubinec

<div id="highlights-block_62e2bc808b6b8" class="highlights">
 <ul>
 <li>Crypto should watch its exposure to other markets and let algorithms handle lending, industry experts say</li>
 <li>“We have seen a significant inflow of crypto companies coming to us asking for risk management solutions over the past month and a half,” an industry exec told Blockworks</li>
 </ul>
 
</div>



For crypto builders hoping to move fast and break things, talk of risk management tends to really kill the vibe.



But <a href="https://cms.blockworks.co/tag/terra/" target="_blank" rel="noreferrer noopener">Terra</a>’s collapse wiping $2 trillion in nominal value from crypto markets, combined with <a href="https://cms.blockworks.co/tag/three-arrows-capital/" target="_blank" rel="noreferrer noopener">Three Arrows Capital</a> (3AC)’s loan default leaving a slew of lenders strapped for cash, many in the space are calling on crypto firms to manage risk more effectively.



Conversations with market participants reveal there is no silver bullet to mitigate risk, but simple corrections could limit the extent of future market downturns. Embattled crypto firms are also receptive to making changes.



Prior to the recent credit crisis, many crypto builders thought of risk management primarily in terms of hack prevention, Adam Zarazinski, the CEO of crypto analytics firm Inca Digital, told Blockworks.&nbsp;



“If you’re looking at risk management and compliance just through the forensics lens, you’re looking at the market with blinders on,” Zarazinski said. “There’s a lot more data other than just Chainalysis.”



Zarazinski’s clients are now thinking more broadly about risk.



“We have seen a significant inflow of crypto companies coming to us asking for risk management solutions over the past month and a half,” Zarazinski said.&nbsp;



Most companies asked for cross-market surveillance to guard against risky exposure and natural language data from social media that can identify market trends early.



<h3 class="wp-block-heading">Widespread leverage across crypto ramps up risk</h3>



Last week, Galaxy Investment Partners CEO Mike Novogratz admitted he was &#8220;<a href="https://www.bloomberg.com/news/articles/2022-07-19/novogratz-says-he-was-darn-wrong-on-risks-of-crypto-leverage" target="_blank" rel="noreferrer noopener">darn wrong</a>&#8221; about leverage risks in crypto and surmised that few could have seen the extent of dangerous exposure in the crypto space.&nbsp;



Hindsight is 20/20, but some in the industry believe portions of the recent crash were preventable.



“Terra wasn’t a shock to anyone who spent time looking at the technology. People had been raising alarm bells for a long time,” Steven Goldfeder, CEO of Offchain Labs, said. “The information was out there” on which crypto firms were not trustworthy.



Meanwhile, US government officials continue to drag their feet on crypto regulation. California Rep. Maxine Waters announced Wednesday negotiations for a US stablecoin bill will be delayed until after the summer congressional recess.



“I hope people are more mindful and do further diligence,” Annabelle Huang, managing partner of Amber Group, said, “instead of saying, ‘Hey, he’s a crypto influencer, let me park my money with him,’ or ‘Just because my friends gave my money to him, it’s safe to [invest].'&#8221;



Court filings show <a href="https://cms.blockworks.co/tag/voyager/" target="_blank" rel="noreferrer noopener">Voyager Digital</a> gave over-leveraged hedge fund Three Arrows Capital an unsecured $650 million loan, leading Voyager to declare bankruptcy when 3AC defaulted.&nbsp;



Voyager and other investors in the $10 billion fund were drawn in part by <a href="https://cms.blockworks.co/with-litigation-likely-venture-fund-defiance-takes-aim-at-three-arrows-capital/" target="_blank" rel="noreferrer noopener">3AC’s reputation as a savvy dealmaker</a>.



<h3 class="wp-block-heading">Remove the human element to help stay afloat</h3>



Huang comes from a traditional finance (TradFi) background and hopes crypto will pick up TradFi’s conservative borrowing practices. “If you have two to five times leverage, you risk being wiped out in a day,” Huang said.&nbsp;



She also emphasized that collateral should be handled algorithmically to control for human error.



“A lot of the losses in the crash from some of the lending platforms likely resulted from the fact they exercised human discretion or extended favor to counterparties during the recession,” Huang said.



Ex-employees reported Celsius’ compliance department only contained three people, a tiny number for a crypto bank at one point handling $25 billion in assets.&nbsp;



Bolstering risk management will require bear-market investment from crypto companies.&nbsp;



Each of the companies Blockworks spoke to said lenders especially should look at bringing on additional full-time risk management staff.



“Companies are a little nervous to spend money but they all know they need more risk management,&#8221; Goldfeder said.



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