Crypto has had a tumultuous season, but the decline in the familiar name FTX still came as a surprise to many. The much-discussed cryptocurrency platform launched in 2019. By 2021, they reported revenue of $1.02 billion, a number that underscores 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 became a huge and worthy competitor for the market leader Binance.
But recent rumors about FTX’s financial stability caused a large number of users to withdraw 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 According to Reuters, $6 billion was withdrawn in 72 hours.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. Initially, it looked like Binance would do this come to the rescuebut Binance later withdrew during its due diligence process.
Now the FTX Group has effectively filed for bankruptcy in the United States and is now being provisionally wound up in the Bahamas, where the company is headquartered. Criminal investigations in both jurisdictions are also ongoing.
The full extent of the damage caused by FTX is not yet fully known, but there is likely to be huge financial loss for a great many people, including in the UK. Now a difficult question arises: why have the UK and other authorities not acted when everyone involved said we should have?
As the FTX drama unfolded, the UK regulator, the Financial Conduct Authority, published a brief note on the matter in its news section. The agency reminded the public of two of its initiatives: Moneyhelper, a free resource offering guidance to consumers with financial concerns, and InvestSmart, a £11m campaign (ca. Smarter Investors. No doubt a well-intentioned effort, but also weak, since it turned out that in this case they could not protect consumers from harm.
Crypto assets are dangerous, we’ve been hearing that from authorities 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? Did the FCA make that statement because it sounds about right, or because UK politicians don’t really know what to do? How do 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”. It almost sounded like parents taking their hands off and telling you, “don’t come back crying later.” However, a mere warning is not enough for a regulator that claims to put the consumer at the center of its work. The huge potential for consumer harm in the face of industry failures should have prompted a more proactive regulatory approach.
The FCA currently regulates the crypto sector from an anti-money laundering and countering the financing of terrorism (AML/CFT) perspective, as a crypto exchange expects funds to change 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.
Last April, Rishi Sunak — who recently became UK Prime Minister — voiced his ambition to make the UK a “global hub for crypto-asset technology.” This came as plans were unveiled, among other things, to create sandboxes, create working groups, and regulate stablecoins — digital assets that remain stable in value because they are pegged to a less volatile asset like gold or a fiat currency.
Last month, policymakers reiterated their intention to bring elements of the sector under their influence under the Financial Services and Markets Act and through the financial support system. 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.
A few weeks later, FTX imploded. With its victims and creditors picking up the pieces, some now argue there wasn’t much regulators could have done.
During an address to Parliament, the Prime Minister of the Bahamas, Philip Davis, said that the country’s crypto regulations could not prevent FTX from collapsing as it has, nor could his country be the sole overseer of global activity of the company had. The statement should not be taken as an argument to oppose regulatory intervention as a preventative measure, but it does contain some truth. It is fair to say that FTX operations have crossed the borders of many jurisdictions and many nations and their regulators have had the opportunity to intervene but have not. When we look at what was supposedly going on inside the walls of FTX, it looks like a very bad business run.
It should 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 eccentricities—an image he himself worked to uphold—provided entertainment. It still doesn’t erase the fact that the company, with over a million customers, had an entire management team at the helm.
FTX failed to implement good controls and lacked fruitful governance structures 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 no one within FTX has stood up sooner.
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 should not happen that huge corporations are allowed to be run in such a vile manner.
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. Terrorist financing) 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 task could be to train them to be better able to navigate the future FTXs yet to come into this world.
It may be too early to ask that question, but here’s the question: how can a group of over a million people — and powerful institutional investors like Temasek and SoftBank — bring many billions of dollars in capital to the same place without realizing it Power that they have and use that to (should) expect more from FTX and regulators? This time, let’s hope we use these events as a costly lesson to become more critical and vigilant about where we put our money.