Crypto has had a tumultuous season, but the fall of the household name FTX came as a surprise to many. The much-discussed cryptocurrency platform launched in 2019. By 2021, they reported revenue of $1.02 billion, figures that show their exponential growth from $85 million the previous year. This rapid increase meant a exchange volume of 719 billion US dollars last year by its 1.2 million users. FTX was huge and a worthy competitor for market leader Binance.
Recent rumors about the financial stability of the exchange led to a large number of users withdrawing funds. According to Reuters, $6 billion was withdrawn in 72 hours. As a result, FTX was forced to seek a bailout as the mass exodus of platform users put uncontrollable pressure on their cash position. At first, it appeared Binance had responded to rescue calls, tweeting that they had signed a letter of intent to acquire the troubled crypto player. Later, these plans fell through during the due diligence process.
The result is that FTX Group entered voluntary Chapter 11 proceedings, effectively declaring bankruptcy in the United States, and is now being provisionally liquidated in the Bahamas, where it is headquartered. The Bahamas Supreme Court on Monday appointed two interim bankruptcy trustees for PwC. Both law enforcement agencies for criminal misconduct and the Securities Commission of the Bahamas for violating their laws conduct criminal investigations.
The full picture is not yet known. In any event, an overwhelming amount of personal financial loss is likely to occur for a great many individuals, some of whom are UK residents. Now a difficult question arises: why didn’t we act when everyone involved said we should?
As events unfolded, the UK regulator, the Financial Conduct Authority, published a brief note on the matter in its news section. They reminded the public of two of their initiatives: Moneyhelper, a free resource offering guidance to consumers with financial concerns, and InvestSmart, a £11m campaign aimed at “helping consumers make better-informed investment decisions and… to become smarter investors”. A well-intentioned attempt, no doubt, but just as weak as it turned out, in this case they failed to protect consumers from harm.
Crypto assets are dangerous, we’ve been hearing that for quite some time. It is said that the crypto industry is under-monitored. Public opinion and regulators have claimed that crypto is not secure. So why has no one acted decisively and intervened? Was the statement made to make because it sounds about right, or maybe because policymakers don’t really know what to do? For example, how can we sometimes procrastinate on tasks that are difficult for us? Whatever the case, no effective intervention followed.
As recently as September of this year, the FCA was forced to issue a cautionary tale to the public about FTX’s unregulated status, meaning consumers “are unlikely to get their money back if anything goes wrong”. Almost a bit like a parent telling you “don’t come back crying later”. A mere warning and an attempt to influence consumer behavior is not enough for a regulator that claims to put the consumer at the center of its work. The huge potential for consumer harm given the industry’s failures should have prompted a more proactive approach to take appropriate action.
The FCA is currently regulating the crypto sector as an anti-money laundering and anti-terrorist financing (AML/CFT) measure due to a crypto exchange believing funds are changing hands. The FCA requires companies operating in the UK to register with them. To achieve this registration, which 38 crypto players have achieved, applicants must demonstrate that they have systems in place to capture and prevent unwanted cash flows. They reported that nearly three-quarters of applicants failed to provide effective controls or withdrew voluntarily from the process.
In April, current Prime Minister Rishi Sunak voiced his ambition to make the UK a “global hub for crypto-asset technology.” This came as plans were unveiled to create sandboxes, create working groups, and regulate stablecoins, a digital asset that remains stable in value because it is pegged to a less volatile asset like gold or a fiat currency, among other things.
Last month they reiterated their intention to bring elements of the sector under their influence under the Financial Services and Markets Act and through the Financial Promotion Scheme. During its annual public meeting on Oct. 12, the FCA faced a slew of questions about the crypto sector that suggest its plans may not go far enough.
Unsurprisingly, Changpeng Zhao — or Binance’s CZ — called for regulation of the sector when addressing the G20 Group of Nations on Wednesday. During a speech to Parliament, the Prime Minister of the Bahamas, Philip Davis, said their regulatory interventions could not prevent FTX from collapsing the way it did. A statement that should not be taken as an argument for rejecting regulatory intervention as a preventive measure altogether, but it does contain some truth. It is fair to say that FTX has pushed many boundaries in its operations, allowing many nations and their bodies to intervene. What’s more, when we look at what was supposedly going on inside the walls of FTX, it starts to look like quite simply running a business very badly.
Perhaps too idealistic a notion considering how much money circulates in this industry. However, it should still not require regulatory intervention for an organization to do honest and good business. It’s worth pointing out the obvious: primary responsibility lies with the management of FTX. The clamor for founder and chief executive officer Sam Bankman-Fried’s eccentricity – an image he helped cultivate himself – is entertaining as the matter unfolds. It still doesn’t erase the fact that the company, with over a million customers, had an entire management team at the helm.
They failed to implement good controls and lacked fruitful governance structures. While not everything we read is true, it clearly points to poor corporate culture and ethics. Too much power was concentrated in too few, inexperienced hands. The company didn’t even seem to be keeping proper books on its digital assets and used unsecured shared email accounts to access private keys. And with so much more of this coming to light, it’s incomprehensible that nobody at FTX stood up.
When a scandal of this magnitude erupts in a sector as contentious as crypto, we need to make it count by analyzing the drivers and not – or no longer – waiting to act. So what would be some of the lessons from this loud event?
First we should learn why we never seem to learn. Because there are too many corporate scandals (think Enron or Lehman Brothers) to choose from in both newer and traditional sectors. It shouldn’t happen that giant corporations are run in such a vile way.
Second, it is an opportunity for organizations, regardless of which sector they operate in, to take stock and step up their efforts to ensure adequate controls are in place. Do you cultivate a corporate culture in which a whistleblowing policy is not just a means to an end? Unsightly practices must find a way to surface. Putting integrity at the heart of running a business remains as relevant as ever. This should pave the way for strong governance structures, comprehensive policies and effective controls.
Finally, it is not inconceivable that regulators, including the FCA, now need to step in more quickly. They have the task of creating a solid framework in which the sector can safely operate. The finding that three out of four companies looking to do business in the UK fail due to AML/CTF should have attracted more attention as it is an indicator of a systemic problem. They should be taught not to leave sleeping dogs lying around and encouraged to delve deeper. By making their intention to protect consumers from harm so explicit, they failed to do so in this case. An additional piece of work might be to educate them so that they are better able to navigate the future FTX that is yet to come to this world.
It may be too early to ask the question, but here’s the question: How can a group of over a million people, bringing together hundreds of billions of capital in one place, not realize the relative power it confers on them collectively , and these benefits expect more from institutions like FTX – and the bodies that (should) have oversight? Let’s hope this time we’ll use the events as a costly lesson to become more critical and vigilant.
will we learn Hopefully we will.