FTX: big bang, bad actors and black holes

Crypto collapse – old bad habits in a new dimension?

As new legal proceedings begin against FTX founder Sam Bankman-Fried, to say these are ‘interesting times’ for crypto currency and virtual assets is somewhat of an understatement. Why do we never learn? And what – if any – new lessons does the final frenzied collapse of FTX have to offer?

Everyone agrees this is a defining moment. Few agree what happens now.  Strangely, there’s comfort, albeit cold, in recognising that this is neither new, nor surprising.  You could have bet that non-existent or vastly insufficient regulation and control around accounting, audit, behaviour, cash management, culture, cybersecurity, data protection, leadership and risk management, combined with global-sized egos and a great deal of other people’s money, was always going to be high stakes.

There are certainly big questions to be answered.

John Ray III, incoming CEO of FTX says he has never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred at FTX”. Given he is a former CEO of Enron, it’s fair to assume he’s seen some pretty bad cases.

Sadly, the effect of this ‘virtual’ collapse is all too real. FTX imploding has had a huge impact, with other companies sucked into the void, either through bankruptcy filings of their own, or other damaging actions forced upon them. And real people suffer.  At its peak, FTX is reputed to have over a million users – and to have been the world’s third largest crypto currency exchange by volume. Its equity investors were among the most sophisticated and largest investors in the world. There should have been a lot of very experienced eyes on this. Instead, a classic ‘bad actor’ seems to have been able to flout all the rules, and create a perfect no-control environment in which chaos flourished.

What happens next? Well, a proper and deep audit is going to take a while.

But this isn’t just about crypto.  It’s about familiar bad habits – bad business, bad behaviour – played out in a new dimension.

As experts in fraud prevention, financial regulation, banking operations and creating the culture that allows people and firms to thrive, these are our recommendations:

  1. Take control. Controls are vital in any financial institution, whether dealing with virtual or traditional assets, payments, lending, in-branch banking or digital banking. Controls are needed to reduce and prevent errors in a cost-effective manner. Deterring fraud, and crucially ensuring priority issues and risks are identified, escalated, and addressed; in turn protecting key stakeholders in the business.
  2. Understand the impact of the brand. Ensure you separate entity from subsidiary and the organisation’s working parts. Financial institutions have a responsibility to understand their vendors, service providers, and counterparties. FTX was the brand, but the business was carried out by more than 130 companies across the globe. And while crypto trading was one part of the business, FTX had built its trading firm and other businesses to increase the velocity of other investments also brought into its ecosystem.
  3. Pay attention to asset segregation and collateral management. It is crucial to ensure a business has sufficient liquidity to run on a day to day basis. Yet FTX seems to have used client funds as collateral to cover margin calls for losses on their proprietary trading business in lieu of having sufficient capital reserves – this is a complete lack of customer protections, which – worryingly – echoes the collapse of MF Global in 2011. We should expect significant future global crypto regulations to include safekeeping and collateral management.
  4. Create a culture of compliance. Financial institutions and regulators alike must take seriously the entire failure to build any culture of compliance. The lack of controls, the lack of governance and oversight and the failure of approach from key ‘senior’ parties in FTX fostered bad behaviour, further enabling a toxic actor’s significant reach and impact in the market. By contrast, a positive culture of compliance starts from the ground up using the ‘power of purpose’ to drive values which are manifested as individual behaviours, which in turn scale across the organisation into a generative culture.  This is supporting by embedding compliance into everyday workflows and sets the foundation and expectations for ‘what good looks like’ across any organization. This is something that both regulators and those who want longevity in the industry need to champion.
  5. Avoid a knee jerk response. Era-defining events are almost always followed by a bold initiative by the regulators. But the complex nature of the Virtual Asset space needs careful consideration more than spontaneity. The good news is that regulators have already started looking at these key issues, and TradFi and VASPs are desperate to launch regulation. In our most recent crypto regulation webinar, we discussed the output from the USA and EU in terms of MiCA, looking at bankruptcy regulation and market manipulation. Other global regulators such as UK, Switzerland, Hong Kong and Singapore amongst others are looking at ways to increase regulations, with a view of making that regulation effective – perhaps even taking the view that less but more robust and better regulation might be better than just ‘more’ of the same. After all, the best definition of folly is to knowingly repeat the same mistakes.
  6. Always beware ‘a star is born’. Big bangs – and big egos – may create new universes. But they also open up black holes.

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I specialise in helping FinTech and Virtual Asset Service Providers execute and assure financial crime compliance objectives

Allen Lewis


I specialise in investment servicing, market infrastructure solutions, middle office and transformational operations and OTC collateral management

I help organisations and the individuals within them change and develop; to be better, more effective and have a positive impact on the clients and society they serve.