Well nobody can say they weren't warned. Every financial page will tell you that investing in crypto currencies is probably the wild frontier of speculation. It is likely that reports of people making thousands in a day have dragged many an unsuspecting innocent into a world that they might not fully understand – and now many of them are paying the price.
John Ray, the man who oversaw the liquidation of Enron – so he knows what he's talking about – has been appointed to oversee the bankruptcy of crypto currency exchange FTX.
He has described it as the worst corporate failure he's seen in forty years.
There was, he said 'a complete failure of corporate controls and such a complete absence of trustworthy financial information'.
The way the business apparently operated was stunning, bearing in mind that this was one on the biggest exchanges in the world handling billions of dollars of crypto currency. They failed to keep proper books and records or security controls over the digital assets held for customers. FTX, apparently, didn't even have an accurate list of its own bank accounts or a complete record of the people who worked for it and it outsourced its accounts department so they had lost control of it.
John Ray stated that the company was in the hands of 'a very small group of inexperienced, unsophisticated and potentially compromised individuals.' There was no corporate structure. Two individuals, Sam Bankman-Fried and technology officer Gary Wang controlled access to digital assets and used an unsecured group e-mail account to access confidential private keys and critically sensitive data. Ray revealed that company funds had been used to purchase private houses and other personal items and expenditure was approved through the use of emojis.
Several of the individuals who controlled the business lived in a luxury villa in a gated community in Nassau, Bahamas. Several of them were having on off personal relationships. These individuals operated in an environment with no formal structure and no Chinese walls between FTX and a private trading company controlled by FTX leader Sam Bankman-Fried called Alameda Research. There is a dispute about an apparent $8bn hole in FTX's finances which Bankman-Fried claims was actually money transferred by mistake to Alameda which they 'forgot' about.
This has not been well received by investors who are mounting class action lawsuits against everyone involved.
This is a complex world and not for the faint hearted but FTX and its associated businesses, Alameda Research and FTX US, seemed to take a very cavalier attitude to other people's money. They appeared to run the business as if it was an exciting technology business run by a group of fun-loving adolescents rather than what it really was which was, effectively, a bank. Within days it had gone from being a major player in the crypto world and valued at $32bn to bankrupt.
There is a bigger point here. Crypto is an exciting and potentially useful source of finance both for businesses and individuals but it is largely unregulated at the moment in most countries and is still seen as risky with very limited investor protection.
It is not known yet how the fallout from FTX will affect the crypto market but the lure of big profits will undoubtedly bring many an investor into the market. However lessons must be learned and potential investors could do worse than to check out the corporate governance of the entities they are dealing with – and this includes banks. The founders of FTX, principally Sam Bankman-Fried, seem to have been able to raise millions if not billions of dollars in start-up funding on the basis of what? – some ideas written on a restaurant napkin (nobody smokes now so no fag packets) and a lot of promises?
Did the lenders check out whether FTX actually had a cash book or any proper records at all? Did they have any non-execs looking at what Sam and his inexperienced and unsophisticated buddies were doing with all that money? Or were they seduced by the dream that crypto makes money and that it's the young and the reckless who know how to do it?
When the basics of good business management are ignored catastrophe is bound to follow as night follows day. Good financial information is vital. Organizing a back office may seem like boring grunt work when you're a high-flying crypto person but it's the grunt work that underpins the business. If you don't know how many bank accounts you have or even how many people you have on the payroll how can you manage the business in any real way?
Well you can't as FTX has shown. Sadly the price to be paid is loss of investors and lenders money. Sam and his pals won't escape unscathed – they have questions to answer and regulators to face not to mention a complete loss of reputation and probable embarrassing faux sympathy from their colleagues in rival and more successful crypto companies which could be more painful than abuse from bank lenders.
Boring is good – boring saves the business from disaster – get the boring bits right and the rest will follow - ignore this at your peril.
John Taylor is an author for accountingcpd. To see his courses, click here.
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