FTX's collapse was caused by 'incompetence and greed', report says

The failed crypto exchange 'was controlled by people who joked about their tendency to lose track of millions of dollars in assets'

FTX founder Sam Bankman-Fried was viewed as having the last word in all significant decisions at the crypto exchange, a report says. AFP

A lack of appropriate record-keeping and control failures as well as “greed” led to the collapse of cryptocurrency exchange FTX Group, a new report has found.

Despite the public image it sought to create of a responsible business, the FTX Group was tightly controlled by a small group of people who showed little interest in instituting an appropriate oversight or control framework, the report by the new management of FTX said on Sunday.

They stifled dissent and misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown, the report added.

“In this regard, while the FTX Group’s failure is novel in the unprecedented scale of harm it caused in a nascent industry, many of its root causes are familiar: hubris, incompetence and greed,” the new management said.

Sam Bankman-Fried — in pictures

FTX collapsed last November after a wave of withdrawals and consequently declared bankruptcy on November 11.

Its founder Sam Bankman-Fried, 30, was arrested in the Bahamas on December 12 after federal prosecutors in the US charged him with eight criminal counts — including conspiracy, wire fraud and money laundering — for allegedly misusing billions of dollars in customer funds before the $9 billion collapse of FTX and Alameda Research.

“FTX Group was tightly controlled by a small group of individuals who falsely claimed to manage FTX Group responsibly, but in fact showed little interest in instituting oversight or implementing an appropriate control framework,” John Ray, chief executive and chief restructuring officer of the FTX Debtors, said.

“We are continuing our efforts to review the events that factored into the fall of FTX and to identify and recover as much value as possible for creditors.”

Although the FTX Group consisted of many separate entities, transfers of funds among those entities were not properly documented, rendering tracing of funds extremely challenging, the report said.

Slack, Signal and other informal methods of communication were frequently used to document approvals. Signal and Telegram were at times used in communications with both internal and external parties with “disappearing messages” enabled, rendering any historical review impossible, the research revealed.

Expenses and invoices of the FTX Group were submitted on Slack and were approved by “emoji”.

“These informal, ephemeral messaging systems were used to procure approvals for transfers in the tens of millions of dollars, leaving only informal records of such transfers, or no records at all,” according to the report.

The management and governance of the FTX Group was largely limited to Mr Bankman-Fried, former director of engineering Nishad Singh and co-founder Gary Wang.

Among them, Mr Bankman-Fried was viewed as having the final say in all significant decisions.

“These three individuals, not long out of college and with no experience in risk management or running a business, controlled nearly every significant aspect of the FTX Group,” the new management said.

With isolated exceptions, the FTX Group lacked independent or experienced finance, accounting, human resources, information security, or cyber security personnel or leadership, and lacked any internal audit function. Board supervision was also effectively non-existent, the report said.

Efforts to clarify corporate responsibilities and enhance compliance were not welcome and resulted in backlash.

The FTX Group also lacked an appropriate organisational structure.

“Rather than having an ultimate parent company able to serve as a central point for decision-making that could also direct and control its subsidiaries, the FTX Group was organised as a web of parallel corporate chains with various owners and interests, all under the ultimate control of Mr Bankman-Fried.”

At its peak, the FTX Group operated in 250 jurisdictions, controlled tens of billions of dollars of assets across its various companies, engaged in 26 million transactions per day and had millions of users.

Despite these asset levels and transaction volumes, the FTX Group lacked fundamental financial and accounting controls, the new management said.

“The group did not have personnel who were experienced and knowledgeable enough to account accurately for assets and liabilities, understand and hedge against risk, or compile and validate financial reports.”

Fifty-six entities within the FTX Group did not produce financial statements at all. Thirty-five FTX Group entities relied on a hodgepodge of Google documents, Slack communications, shared drives, and Excel spreadsheets to manage their assets and liabilities, the report found.