[ad_1]
The FTX collapse offers a master class on risk management and accounting missteps in the cryptocurrency industry that sets the alarm.
This is because court documents confirm that the world’s third-largest cryptocurrency exchange was set up from the ground up, so customers’ funds entrusted to the platform could be stolen without the owners’ knowledge. with or without your consent.
Infamous FTX founder Sam Bankman-Fried has called risk management “probably the most important thing you do at FTX” in the past.
According to a recent Securities and Exchange Commission (SEC) filing, FTX’s guiding white paper touted that the exchange was built on an “industry-leading risk management system,” and that FTX’s ” The liquidation engine” boasted of being a safe and reliable method for the platform. Manage risk.
The “engine” is reportedly a set of rules designed to automatically trigger certain actions that reduce client account risk, such as selling collateral if the account is overextended. was expanded.
In practice, as a result of the specific way in which the cryptocurrency trading platform has been centralized to support the activities of sister hedge fund Alameda Research with “unlimited credit,” internal risk management over the unsecured use of funds is There was not.
Former Alameda CEO Caroline Ellison and FTX co-founder Gary Wang, the software engineer responsible for writing the code that gave Alameda Research special permission, were mixed in their guilty pleas. , with Alameda conversely making increasingly large deals with diminishing control, they agreed to cooperate with the authorities.
By contrast, last week (January 3), Bankman-Fried filed eight criminal charges against him in connection with the collapse of his company and the loss of billions of dollars in client assets. and pleaded “not guilty”.
Looking back, red flags were everywhere
Irrespective of industry, when a company is privately held and not subject to the disclosure requirements that public companies face in incorporated jurisdictions, determining how effective the claimed controls are is a matter of context. It can be a difficult task until it starts working. bad.
Interim CEO John J. Ray III, who was appointed to oversee the bankruptcy and restructuring of FTX, said of the imploded cryptocurrency exchange: , human resources, and system integrity. Never in my career have I seen such a complete failure of corporate management and complete lack of reliable financial information as happened here. ”
Strong words from those responsible for the stunning unwinding of the Enron scandal 20 years ago, according to most creditors.
While PYMNTS research shows that developing infrastructure risk and control strategies to prepare for black swan events is critical to sustaining growth while mitigating risk, FTX and Bankman – A repeated allegation made by Fried and similarly filed with regulators is that another internal control allowed FTX’s sister hedge fund, Alameda Research, to use client funds for its own trading purposes, Bankman-Fried’s “24/7” automated risk monitoring engine has essentially become meaningless.
Dating back to at least 2019, the SEC claims that FTX’s operational reality, now revealed by the bankruptcy filing, was little more than a “brazen multi-year scheme” to defraud customers and investors.
After all, a well-functioning risk management program does not hang in front of investors or blind the eyes of regulators. Instead, it represents a significant collection of systematic processes that underpin your business.
Innovative benefits for me not for you
As communicated in the SEC filing, FTX has very poor internal controls, including no chief financial officer or independent board of directors, and “all forms of assets and liabilities are generally interchangeable. had fundamentally “flawed” risk management procedures that allowed it to be “treated as
For financial exchanges designed to facilitate the trading of digital cryptocurrency assets, not distinguishing between customer assets held in custody has distinct advantages only for the exchange itself, but for the money entrusted to Represents a clear and present danger for clients with mixed investments. without their go-ahead or knowledge.
It also creates great exposure to the risks created by the original positions on the exchange. As such, his management of FTX, the type of company that undermines internally and drives externally, is critical in establishing sustainable guardrails for growth.
The reality of FTX’s operations stood in stark contrast to the repeated claims made by senior leaders about risk management processes and controls. This assertion helped FTX present an image to the public and investors as a mature company that strictly manages money and risk. and conservative methods.
Most FTX entities have never held a board of directors, and CEO Ray has shown during bankruptcy proceedings that he does not trust the financial statements provided by FTX Enterprises.
As Bankman-Fried eventually admitted in a television interview after his company’s spectacular bankruptcy, “I didn’t put the time or effort into managing FTX’s risks.” says. Bankman-Fried continued, “If he spent an hour a day thinking about what happened, what happened, and FTX risk management, I don’t think this would have happened.” .
laundry list of failures
From corporate governance to risk management to celebrity hype and false advertising, FTX was full of obvious flaws in retrospect. As Ray said in his testimony, FTX’s practice is “really antiquated embezzlement…just taking money from customers and using it for their own purposes.”
The silent majority of the digital asset industry operates between a regulatory gray zone and offshore jurisdictional gaps and is chosen for its lax oversight. FTX’s failure made us aware of the inherent dangers of choosing celebrity spokespersons over the usual audited financial disclosures.
While risk disclosure is a cornerstone of U.S. financial regulation, little disclosure has been done in cryptocurrencies and these existing attempts often lack integrity.
Because cryptocurrency companies often offer a wide variety of products and services across platforms that perform many functions, their lines of operation are often vague and increasingly conflicted, to the detriment of their customers.
In contrast, traditional financial firms that offer a variety of services typically register separate lines of business with the respective regulators responsible for oversight.
As Ron Kruszewski, chairman and CEO of Stifel, one of the very same traditional financial firms, told PYMNTS, “If I was running a crypto fund, I would sit in front of you and say, I would say you have to guarantee that you put your money into your customers cryptocurrency is exactly like keeping money in the bank welcomes regulation and all of this I find surprising is that I mean, I haven’t yet seen a cryptocurrency leader say, “We separate client funds from client securities.” Until they can say “yes” to that. The industry does not move forward. ”
Ultimately, Cavate Emptor is not a sustainable strategy for long-term industry growth.
For coverage of all PYMNTS cryptocurrencies, visit every day Crypto Newsletter.
PYMNTS Data: Why Consumers Are Trying Digital Wallets
According to the PYMNTS survey, New Payment Options: Why Consumers Are Trying Digital Wallets, 52% of US consumers will try new payment methods in 2022, with many choosing to try digital wallets for the first time. bottom.
[ad_2]
Source link
