Could the collapse of FTX have been avoided?
Could the collapse of FTX have been avoided?
Crypto

Could the collapse of FTX have been avoided?

By Andrea Porcelli - 22 Nov 2022

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Every industry enthusiast has wondered: was the collapse of FTX something that could have been avoided?

We have been suffering the effects of the FTX collapse for days now, many things have changed in the last few days in the blockchain and cryptocurrency universe. Many tokens from various companies have drastically dropped, non-custodial crypto wallet purchases have increased, and authorities are moving sharply to normalize the ecosystem more. 

In short, the domino effect started a while ago, and the effects are there for all to see.  

Ideas are mixed: some believe that the industry will come out of this crisis with time, some think that the damage will be further, and some even think that the market will only benefit from all this. 

Here’s why the collapse of FTX could not have been avoided

Several days after the collapse in the market of the FTX platform, the story is very clear to everyone. After careful analysis, one can come to understand what the underlying problem was that triggered the crisis. The FTX exchange platform, despite being one of the most famous and important in the crypto exchange industry, had a very unsound financial foundation.

Sam Bankman Fried and his board, were running the operations from the Bahamas. One of the most detrimental decisions for the company was to finance their company’s investments (even at a loss) and expenses, leaving all the platform’s funds, belonging to investors, uncovered. 

Moreover, speaking of the bear market period, it was very difficult not to generate losses.  

Add now to the underlying problem (an unsound financial base), the circulating news that there was a huge hole in the balance sheet of SBF’s second company.

From the report of an investigation it had been discovered that the company Alameda Research had used FTT tokens created by FTX as collateral to obtain million-dollar loans

However, the bottom was touched at the time when Changpeng Zhao, CEO and founder of Binance, the most important platform in the exchange industry, said he wanted to sell all the FTT they had on their balance sheet. One of the most important men in the crypto ecosystem showed that FTX had a problem, and exposed it in front of everyone. 

So to recap: Sam Bankman Fried and his platform certainly did not enjoy a strong and stable financial base. The media held evidence that there was something wrong with the SBF companies’ balance sheet. The CEO of Binance decided to distance himself as much as possible from the situation of FTX and Sam B Fried, because it was not in line with his integrity. 

These three major events triggered the FTX crisis, the crisis that will one way or another change the cryptocurrency market forever. 

So it would hardly have been possible, starting with the underlying problem of the company and its CEO, to avoid such a crisis. 

Undoubtedly, a lot of collateral damage could have been limited, but with greater effort, it could have come to be avoided completely.

The investigation by US prosecutors months before the collapse

Enhancing the argument that it was almost impossible that the FTX collapse could have been avoided is the news that the exchange platform created by SBF had already been on the radar of US federal prosecutors for several months. It is unclear whether US prosecutors reached a conclusion before FTX collapsed, taking many other companies and projects with it.  

However, the investigation showed that FTX’s various operations were already dubious even before billions of dollars were exchanged with Alameda Research. It is now up to the authorities to prove that the loss of FTX clients’ funds is related to the motion in which the investors’ assets were held. Proving fraud requires finding a connection that shows the way the funds were managed. 

Prosecutors along with the SEC, are working side by side with FTX’s new CEO, John J. Ray III, regarding the company’s bankruptcy proceedings and also the investigation. 

FTX’s bankruptcy will help prosecutors understand what documents exist to subpoena. Investigators will also be looking for communications between employees, whether via email, Slack, Signal or WhatsApp, as well as testimony from figures involved.

What if the collapse of FTX is good for the market?

There are many figures in the crypto and blockchain ecosystem who have come out in favor of regulation of the industry. One among them is the very CEO and founder of Binance, Changpeng Zhao. So is the founder of Ethereum, Vitalik Buterin, who has also been very supportive of increased controls in the industry. 

But what if this really is the time to revolutionize the industry?

John J. Ray III, an expert in handling bankruptcies who was given the role of CEO of FTX after the resignation of Sam Bankman Fried, commented:

“Never in my career have I witnessed such a failure of corporate controls, and such a complete absence of reliable financial information.

Compromised systems integrity, fallacious overseas regulatory oversight, concentration of power in the hands of a small group of individuals with little experience and moral integrity-this situation is unprecedented.”

Thus, the main goal is to prevent such an incident from happening again.

In light of what we know now, it is critical that the industry as a whole conduct a thorough investigation and weed out the bad apples: the industry would not survive another FTX; it cannot afford another crisis.

The industry should give more room to innovative and reliable projects, allowing those who really deserve to prosper and cutting out the crooks before they have a chance to reap victims. 

Working with extreme security and reliability, the way the industry giants aim to go. 

The cryptocurrency ecosystem is at a crossroads: it will have to innovate, regulate, overhaul and start over. If not, it will fail. The FTX saga represents a clear signal; it is time to make a choice.

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