FTX Scandal: Was it Preventable by Investors?

What is FTX Scandal?

Recently, on Nov 11th, 2022, FTX’s former CEO Sam Bankman filed FTX for bankruptcy. This came after a turbulent month featuring a leaked balance sheet and rivalry taking advantage.

FTX was a leading cryptocurrency exchange, along with its rival Binance. It was founded in 2019 and raised a total of $1.8 billion in its four-year lifespan.

FTX began operating initially at Alameda Research, a trading firm founded by Bankman and a huge part of its downfall.

After months of operations, FTX issued its own cryptocurrency FTT. It is used initially to lend to customers looking for loans to trade. Instead of taking loans in U.S. dollars with 10% interest, the FTT offered loans, less trading costs, and better operations.

Half a year after FTX started operating, Changpeng Zhao of Binance purchased a 20% stake at FTX with the “aim to grow the crypto economy together.”

Fast Forward to 2021, tensions between Bankman and Zhao arose. FTX was trying to get a license in Gibraltar, which required the sources of wealth for major shareholders at FTX. According to Ruiters, Zhao neglected the repetitive requests by FTX’s team for the documents needed. This led Bankman to purchase Zhao’s stake in FTX for $2 billion, part of which was paid in FTT. Now that Zhao is no longer a stakeholder at FTX, the company was granted its desired license successfully.

FTX’s Crash

On Nov 2nd, eight days before Bankman filed for bankruptcy, Coindesk revealed that Alameda’s balance sheet has too many assets in FTT: of $14.6 billion, $5.88 billion were in FTT.

Four days later, after it became clear Bankman has lent FTX’s own customers money to Alameda, the FTX token began to crash. Zhao then tweeted that he would be selling his own FTT, driving its value further down.

With no cash at hand to fulfill the surged withdrawal, Banckman was looking for ways to receive additional funds. As a final desperate move, he reached out to Binance to acquire FTX and fulfill the customers’ orders. After a short due diligence process, Binance publicly rejected the offer. And on Nov 11th, Bankman filed FTX for bankruptcy.

Was FTX’s Downfall Avoidable?

The whole FTX scandal is still under investigation. However, one thing is clear for now: lending the customers’ money to Alameda is just too risky, neglecting the ethical part of it.

Lending to Alameda simply put FTX at a huge financial risk, at the mercy of public news, and at the mercy of its direct competitor Binance.

The customer’s trust is the heart of any exchange company, let alone a crypto exchange.

Avoiding this downfall could have started with proper corporate governance. FTX is backed by $1.8 billion funds provided by private stakeholders, some of which are big names in the VC industry. If there were transparency and clear governance, these actions would have been easily avoidable.

Corporate governance needs to be taken more seriously for everyone’s sake. Customers lost millions of dollars of savings. Investors lost their chance of a successful company. In the VC game, very few companies make it. Losing one of these successful companies is unaffordable. Finally, industries get shaken and upcoming investors lose trust after a huge downfall, reducing the potential for other companies.

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