Genius-in-the-dumps! Some Lessons from the FTX Debacle

FTX, an abbreviation of “Futures Exchange”, was co-founded by Sam Bankman-Fried (SBF) in May 2019. The trajectory of growth of FTX, which operated from Bahamas, has been phenomenal and it stood tall in the crypto exchange market. Before the negative news started pouring in, FTX held its position as the world’s third largest crypto exchange. Even Binance, the market leader in crypto market, was one of the first investors in FTX exchange.  The company’s dream-run in just over three years was meteoric and aspirational for many in the tech and startup world. Not surprisingly, until recently, SBF was considered a kind of crypto wunderkind, a genius destined to profit handsomely from the tech sector’s meteoric rise.

Trouble in paradise-a quick recap

Amidst the news in October 2022 that FTX was under investigation in Texas for allegedly selling unregistered securities, media reports also revealed the close relationship between Alameda Research and FTX. The latter had reportedly lent $10 billion of its customer assets to Alameda Research in 2022. It was alleged that FTX used software to conceal the misuse of customer funds.

A few weeks later, Binance decided to sell/ liquidate their FTT positions, a development that caused a widespread panic situation in the crypto markets and holders started selling their FTT holding. The panic also spread across to other altcoins and Bitcoin. The crypto market crashed roughly 20 per cent and fell below the $1 trillion levels.

Great Fall!

The world watched with dismay, how amid mass sell-offs and dropping liquidity, FTX reached out to Binance for help. Apparently, as a friend in need, Binance did announce its intent to acquire FTX and bail it out of this crisis. With this, the markets had just started to stabilize when Binance took a U-turn on its stand. The exchange took to Twitter to say that after due diligence, they have decided not to acquire FTX because of “mishandled customer funds and alleged US agency investigations”. 

The developments of just a few weeks led to a collapse of SBF’s empire and shrunk his fortune from a high of $32Bn in Jan’22 to $0Bn.

Tremors-wide and far

Now, after the shocking debacle, while the genius and his company are facing regulatory investigations on the nature of FTX’s connections to other related holdings, its handling of client funds and liquidation/bankruptcy issues, FTX’s in-house legal and compliance teams, for the most part, resigned and its employees deserted, selling assets belonging to the company.

The great fall of FTX has jolted 50 lakh customers across the world who used the exchange to transact and invest in crypto. The FTT crypto, which traded at $80 at its all-time high has wiped out billions of dollars’ worth of wealth. The collapse has been compared to bankruptcy of Lehman Brothers and further compared the collapse to the Enron Scandal. Some has called for US Congress to grant the organization more power to regulate cryptocurrencies.

The crypto universe felt the deep tremors of the collapse of FTX and will continue to experience the after-effects for long. And all this will make the genius a prime target for regulators and skeptics hoping to rid the cryptocurrency industry of its wildest excesses.

Questions haunt while the story still unfolds

The picture is still emerging, with every day some new fact or fiction coming to the fore. But a couple of real and disturbing questions are haunting the minds of the cryptocurrency industry players, regulators and the public at large.

#1. How can a company afford to have such massive failure of corporate controls and systems integrity, and absence of trustworthy financial information? What about internal audit and regulatory oversight?

#2. Though SBF maintained that FTX never invested the deposits of crypto account holders on the exchange, how Alameda -which he also owned -could borrow big money from FTX’s balance sheet for investments? How long the messy, opaque and crafty accounting was continuing?

#3. Was it fair for Binance, to announce one day that it will buy FTX, effectively bailing out its main competitor and then reversing course the next day, saying the issues at FTX were “beyond our control or ability to help”?

#4. Though FTX’s collapse doesn’t speak to the core technology behind any specific cryptocurrency, will it not damage trust in the entire industry? Specifically, will it not raise questions around the power of centralized platforms – like FTX, Binance, Kraken and Coinbase? 

#5. Is it okay to do unethical things “for the greater good”-a position utilitarians, which SBF identified as in the past, might hold?  Whether it was acceptable to run a cryptocurrency exchange in the first place, and whether the good he claimed he meant to do, made it moral?

#6. Will SBF stand again on its feet and redeem himself? Even if he finds investors and is able to secure funds, would it be easy for him to get both creditors and the bankruptcy court on board?

#7. Last but not the least, can concentration of control in the hands of a small group of genius techies/ “disruptors” but inexperienced, imprudent, and potentially compromised individuals, build a trusted and sustainable business?

Ingenuity Not Enough 

While the episode depicts a story of innovation, ingenuity, ambition, power of technology that can erect an empire of riches in no time, yet, its flip side tells us a tale of imprudence, deceit, dishonesty, and consequences of operating in a referee-less system. The saga offers us learnings that talent or ingenuity, however profound, if unaided by discipline, ethics and wisdom, can wreak havoc.

Written by Ram Krishna Sinha.
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