FTX, one of the World’s largest cryptocurrency exchanges, collapsed on November 11. Among the nascent cryptocurrency sector, many saw FTX as one of the most transparent and trustworthy exchanges. Cryptocurrency is difficult to regulate, and thus traders must place tremendous faith in exchanges to ensure that their money is safe.
According to The Wall Street Journal, Sam Bankman-Fried, the CEO and founder of FTX, used up to $10 billion in customer assets to fund high-risk ventures. On November 6, a CoinDesk report revealed concerning elements in the balance sheet of Alameda Research, Bankman-Fried’s trading firm. The report triggered a series of events that caused speculation about FTX’s liquidity. When losses piled up, and customers withdrew their deposits, FTX could not pay back their customer’s principal. Within a matter of days, they filed for bankruptcy and liquidated the entire company.
There are numerous suspicious aspects of FTX’s business practices and Bankman-Fried himself. Instead of basing his company in a nation with strong regulation like the United States, the American-born and educated Bankman-Fried operated FTX out of Nassau, Bahamas. The Bahamian government lacks many of the resources and experience of SEC (Securities and Exchange Commission) regulators, which may have contributed to the financial fiasco. Despite the enormous size of FTX’s assets, a group of 10 FTX employees made the entirety of the company’s decisions rather than allowing an outside board of directors to control the company. Business Insider claims that there were numerous romantic relationships between these figures, generally a business malpractice. Furthermore, the close relationship between FTX and Alameda Research also is suspicious. Allegedly, Alameda used FTX’s customer’s funds for their own trading, a practice that is illegal under United States securities law. Through both the courts of law and public opinion, FTX will be scrutinized for years to come.
Beyond the obvious issue of losing billions of dollars of customer investments, there are questions to be answered about the future of cryptocurrency in the United States. Because it is such a new commodity, cryptocurrency is relatively unregulated compared to traditional investments. As more investors and more money begin flowing into cryptocurrency, the more important safeguards are. Chengweng Zhao, the CEO of Binance, FTX’s greatest competitor, said to Reuters that “It’s better to regulate the industry instead of trying to fight against it.” Whether or not regulation will calm the current issues with cryptocurrency remains to be seen.