FTX Group’s downfall, previously helmed by Sam Bankman-Fried (SBF), serves as a warning of mishandling and governance issues within the crypto realm. In the latest report released by the US bankruptcy administrators regarding the FTX case, it was revealed that the exchange had experienced significant control lapses leading to its eventual collapse. The lawyers representing the administrators also announced the retrieval of “distributable assets” amounting to $7.3 billion.
Lack of Management and Governance Control
According to Lexology, the report states that FTX’s management was limited to a small clique led by SBF, who along with Nishad Singh and Gary Wang, had no prior experience in risk management or managing a business. Likewise, the company did not have personnel with sufficient experience or independence in the areas of finance, accounting, human resources, information security, or cybersecurity.
Additionally, there was no board oversight, and the company did not maintain a comprehensive organizational structure or a complete employee roster.
Inadequate Financial and Accounting Controls
The US bankruptcy administrators pointed out that there were significant accounting and control failures within the FTX Group. The result of the investigation stated that the company lacked an adequate accounting system, and 56 entities within the group failed to produce any financial statements.
The probe found that the external accountants hired by the company were not properly evaluated for their suitability, and they lacked the necessary expertise to handle the various products the FTX Group dealt with. The findings also highlighted the issue of expenses and invoices being submitted and approved via Slack using emojis, resulting in only informal records of transfers being kept.
Deficiency in Digital Asset Management, Information Security, and Cybersecurity Controls
The findings alleged that the FTX Group did not follow standard security protocols to safeguard the digital assets it managed. The exchange did not require multi-factor authentication (MFA) for its employees and systems, even though it was recommended to customers.
Furthermore, FTX did not have any system in place to promptly detect unauthorized access to the private keys of its central exchange wallets, which held substantial amounts of cryptocurrencies.
Asset Recovery and Bankruptcy Restructuring
The recovery efforts led by Ray and his team have resulted in the retrieval and secure storage of digital assets worth $1.4 billion. They are also currently in the process of recovering an additional $1.7 billion in digital assets.
These efforts have raised the total amount of assets available for recovery to $7.3 billion, which has given creditors of FTX Trading a glimmer of hope for increased payouts. The administrators are targeting to present an initial restructuring plan in July, and they anticipate the Court to approve the final plan by the middle of 2024.
FTX Case: A Cautionary Tale
The FTX case highlights the importance of different types of controls crucial in the operation and regulation of a crypto exchange. The report reveals the consequences of ignoring these and the potential harm they could bring about to a nascent industry. The collapse of FTX was largely due to these failures rather than crypto-specific business risks.
The cryptocurrency industry is still in its relatively early stages, and as the industry grows, it is essential to implement sound control measures to mitigate risks. The FTX case serves as a cautionary tale for investors, entrepreneurs, and regulators. The industry must take a step back and evaluate the existing safeguards to ensure that these failures do not happen again.