November 29, 2022
Technical Staff
FTX is a cryptocurrency exchange that allows users to buy and sell crypto assets. Cryptocurrencies all share the same basic structure as their star asset, bitcoin: a publicly accessible “blockchain” that records ownership without controlling central authority. FTX is significant because it, along with its competitor Binance, handles most cryptocurrency transactions worldwide. 1
On November 2, 2022, an article in CoinDesk, a cryptocurrency industry news service, sparked a crisis. It said that the balance sheet of Alameda, a crypto hedge fund owned by FTX’s founder, Sam Bankman-Fried, contained billions of dollars in FTX’s cryptocurrency, FTT and that it had been used as collateral in additional loans. If this is the case, a drop in the value of FTT could harm both businesses due to their shared ownership. However, FTT had no value beyond FTX’s long-standing promise to buy any tokens for $22, raising concerns that the entire institution is fragile. 2
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” John Ray, the new FTX CEO who oversaw the Enron bankruptcy proceedings, said in a court filing. 3
Where were the lawmakers and regulators
Bankman-Fried and his holdings have been the subject of investigations in the United States and abroad. The Treasury Department has quietly contacted other large cryptocurrency exchanges to assess the risks of more significant contagion. A slew of congressional committees has begun their investigations, including a House investigation announced Wednesday that could see Bankman-Fried testify under oath next month. 4
Where were the auditors?
According to John Ray, the following has been disclosed:
- Prager Metis, “a firm with which I am not familiar and whose website states that they are the ‘first-ever CPA firm to open its Metaverse headquarters in the metaverse platform Decentraland formally,'” was the auditor of FTX.com, the non-U.S. exchange arm. On the audit, he claimed to have “serious concerns.”
- The filing highlights Sam Bankman-Fried, the former CEO of careless management. Ray claimed that there was no reliable list of bank accounts and account signatories and that the trustworthiness of banking partners received even less consideration. The most recent assessment shows FTX has $564 million in cash.
- Ray added that Bankman-Fried frequently used applications that were programmed to remove themselves after a brief period of use and urged staff to follow suit. 5
Preliminary Knowns; Waiting for Revealing the Unknowns
FTX suffered from the following:
- Internal control failure,
- Corporate governance failure, and
- Management failure
Lawmakers and regulators are laggers. They are not proactive. They did not anticipate such a catastrophe at all.
Lawmaker(s) and/or regulators may have had conflicts of interest. They should have avoided such a Ponzi scheme! Time will tell. Let us wait and see.
Sources
- Read more on https://www.theguardian.com/technology/2022/nov/10/what-happened-to-ftx-and-could-crisis-spill-over-to-rest-of-crypto
- Ibid
- Read more on https://abcnews.go.com/Business/ftx-ceo-complete-failure-corporate-controls-career-including/story?id=93488990
- Read more on https://www.washingtonpost.com/us-policy/2022/11/17/congress-crypto-ftx-regulations-law/
- Read more on https://www.marketwatch.com/story/new-ftx-ceo-says-hes-never-seen-such-a-complete-absence-of-trustworthy-information-and-he-presided-over-enrons-bankruptcy-11668691648
Image by Sergei Tokmakov, Esq. https://Terms.Law from Pixabay
