Why FTX collapse is adding up to a crypto crunch point


The details of the alleged fraud have been stunning, especially because Bankman-Fried was the poster boy for crypto “that you can trust.” The billionaire was regularly seen in Washington pressing the flesh with regulators who bought his story. Many backed his push for greater regulation in the crypto world, although many others did not.

But that appears to have given Bankman-Fried a shield against proper oversight, one that he apparently used to break all the rules of corporate governance by allowing his investment business to use the money of “depositors” to make risky and ultimately unsuccessful bets. The US Securities and Exchange Commission and Justice Department are now investigating.

Image problem

Already suffering from a “tech bro” image problem, FTX has shown the industry in a negative light that even the sceptics didn’t imagine as the details about the shambolic administration of FTX became even more unbelievable.

In a savage report released on Friday, FTX’s new CEO said: “Never in my career have I ever seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

John J Ray III, the administrator who oversaw the investigation into the Enron fraud, added: “From compromised systems integrity and faulty regulatory oversight board, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

Ray found that many FTX entities never held board meetings and the FTX group did not maintain centralised control of its cash. The report said there were no accurate lists of bank accounts and not much attention was paid to the creditworthiness of banking partners. Ray has not been able to compile a list of who actually worked for the FTX Group.

Meanwhile, the industry implications of the collapse of FTX are huge. It has seen some centralised exchanges around the world open their books in a “proof of reserves” gesture and emailing customers to reassure them that their assets are safe.

Other exchanges are feeling the pain after several weeks of FTX-triggered turmoil. They either held large swathes of the now worthless FTT token on their balance sheets. Or they used the FTX platform to hold cryptocurrency and watched their holdings evaporate.

Money has rushed out of Gemini, OKX and Crypto.com; BlockFi and Voyager are preparing for bankruptcy; and customers are unable to withdraw money from their frozen accounts.

Seething industry

The crypto industry itself is seething. Traditionally, part of the culture has been, if you out-trade someone, if you win at the game of numbers, then you deserve your prize.

But the extent of the likely deception at FTX, and a seemingly deliberate strategy to use American regulators to help suck assets up into the FTX platform, has damaged the trust of an industry that has made a point of calling itself “a community”.

That damage has likely been compounded by the main players in the FTX saga. There’s a video of Alameda chief executive officer Caroline Ellison apparently telling an audience she thinks “stop losses” are kind of stupid. “I just don’t think they’re an effective risk management tool,” the 28-year-old says into the microphone, before declining to describe some of her worst trades. “I don’t see the point of sharing that kind of information,” she laughs.

It has also emerged that Bankman-Fried told a VOX reporter: “Yeah just PR. F— regulators,” he said in response to questions on whether his commitment to working with regulators to make crypto safe was just public relations.

And when questioned about his commitment to philanthropy and “effective altruism”, a philosophy that encourages people to earn as much as they can to give away to good causes, he replied: “I feel bad for those who get f—ed by it.”

“But this dumb game we woke Westerners play … we say all the right shibboleths and so everyone likes us.”

However, others in the industry expressed scorn about FTX. “Even playing on cheat mode they still lost money,” said one long-time crypto investor based in Europe. “I’ve been through worse haircuts than this, but they couldn’t even win when they were making the market.”

Meanwhile, governments and regulators are swinging into action. Australia pledged this week to introduce custodial and exchange legislation that aims to prevent a repeat of the losses suffered by local customers in the collapse of the FTX cryptocurrency exchange. And it is cracking down hard on unlicensed crypto companies spruiking products it considers financial products.

But, at the moment, that’s cold comfort for people like Blake. He is furious he wasn’t quick enough to pull money out like the institutional-grade investors who sensed trouble a few weeks ago.

The fallout for him will last years. “Losing that kind of money is pretty terrible for us,” he says, of his family. “This has gone from being a pretty good Christmas to a really, really, really bad one.”



Source