The details of the alleged scam were intriguing, especially given that Bankman-Fried was the crypto poster boy “you can trust.” The billionaire was regularly spotted in Washington squeezing the flesh of the regulators who bought his story. Many supported his push for more regulation in the crypto world, although many others did not.
But that seems to have given Bankman-Fried a protective shield against proper oversight, which he appears to have used to break all corporate governance rules, allowing his investment business to use “depositors” money to invest in risky and ultimately unsuccessful ones place bets. The US Securities and Exchange Commission and the Department of Justice are now investigating.
Already suffering from a “tech bro” image problem, FTX has shown the industry in a negative light that even the skeptics could not imagine as the details of FTX’s messy management became even more believable.
In a brutal report released on Friday, FTX’s new CEO said, “Never in my career have I seen such a complete failure of corporate controls and a complete lack of trustworthy financial information as here.”
John J Ray III, the administrator who oversaw the Enron fraud investigation, added: “From the compromised systems integrity and flawed regulatory oversight body, to the concentration of control in the hands of a very small group of inexperienced, inexperienced, and potentially vulnerable individuals, this situation is unprecedented.”
Ray noted that many FTX companies never held board meetings and the FTX Group had no central control over their cash. According to the report, there were no accurate lists of bank accounts and not much attention was paid to the creditworthiness of banking partners. Ray was unable to compile a list of who actually worked for FTX Group.
Meanwhile, the impact of the FTX collapse on the industry is huge. It has seen some centralized exchanges around the world opening their books in a “proof of reserve” gesture and emailing customers to reassure them that their assets are safe.
Other exchanges are feeling the pain after several weeks of FTX-induced turmoil. Either they held large chunks of the now worthless FTT token on their balance sheets. Or they used the FTX platform to hold cryptocurrency and watched their holdings disappear.
Money has tumbled out of Gemini, OKX and Crypto.com; BlockFi and Voyager prepare for bankruptcy; and customers cannot withdraw funds from their frozen accounts.
The crypto industry itself is on the move. Traditionally it was part of the culture that if you beat someone, if you win at the numbers game, then you deserve your prize.
But the scale of likely deception at FTX, and a seemingly deliberate strategy of using American regulators to help suck assets into the FTX platform, has damaged confidence in an industry that deliberately calls itself “one community.”
This damage was likely amplified by the main players in the FTX saga. There’s video of Alameda Chief Executive Officer Caroline Ellison apparently telling an audience that she thinks “Stop Losses” is pretty dumb. “I just don’t think they’re an effective risk management tool,” the 28-year-old says into the mic, before declining to describe some of her worst trades. “I see no point in sharing that kind of information,” she laughs.
It also emerged that Bankman-Fried told a VOX reporter, “Yeah, just PR. F—Regulators,” he replied when asked if his commitment to working with regulators to make crypto safe was just public relations.
And when asked about his commitment to philanthropy and “effective altruism,” a philosophy that encourages people to earn as much as they can to donate to good causes, he replied, “I feel bad for those who will be fooled.”
“But this silly game we westerners woke up playing…we all say the right shibboleths and that’s why everyone likes us.”
However, others in the industry expressed contempt for FTX. “Even if they played in cheat mode, they still lost money,” said a longtime crypto investor based in Europe. “I’ve been through worse haircuts but they couldn’t even win when they hit the market.”
Meanwhile, governments and regulators are taking action. Australia this week pledged to introduce custody and exchange legislation aimed at preventing a repeat of losses suffered by local customers in the collapse of cryptocurrency exchange FTX. And it cracks down on unlicensed crypto companies offering what it considers financial products.
But right now that’s cold consolation for the likes of Blake. He’s furious that he wasn’t fast enough to withdraw money like the institutional investors who felt trouble a few weeks ago.
The consequences for him will last for years. “Losing that kind of money is pretty awful for us,” he says of his family. “It went from a pretty good Christmas to a really, really, really bad one.”
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