The fall of FTX and Sam Bankman-Fried might be good for crypto

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information,” new FTX CEO John Ray III said in a legal filing on Thursday. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

Ray, who oversaw Enron’s bankruptcy in 2001, stepped in as CEO shortly after founder Sam Bankman-Fried resigned (and reportedly tried to flee to Argentina, although he denies it). He is absolutely right that FTX was brought down by a complete failure of corporate controls, but in reality, the situation is far from unprecedented.

And unless the whole industry gets a grip, it will keep happening.

That’s why the exchange’s collapse might actually turn out to benefit crypto in the long term: although right now it seems it’s only contributing to tarnishing its reputation, the FTX saga playing out before our sorry eyes is a chance to turn things around before it’s too late — which is to say, before greed, negligence and corporate malpractice bring the entire industry to its knees.

Essentially, cases like FTX’s are a time bomb waiting to explode, and the longer they are left unchecked, the bigger the damage they can cause becomes. This is evident purely by looking at the scope of the deception at play and relating it to the company’s valuation, which, just in February, stood at $32 billion, or more than the Nasdaq, Credit Suisse and Robinhood. Of that, Bankman-Fried’s personal fortune stood at $16 billion. In his own words, “sometimes life creeps up on you.” Well, sometimes, so do the consequences of your own actions.

Now, the United States Department of Justice and the Securities and Exchange Commission are investigating the collapse. California’s Department of Financial Protection and Innovation (DFPI) is also opening an investigation, and so are authorities in the Bahamas. Legal experts suggest FTX’s use of customer money could constitute fraud or embezzlement. Oh, and a class-action lawsuit alleges that “FTX’s fraudulent scheme was designed to take advantage of unsophisticated investors” who “collectively sustained over $11 billion dollars in damages.”

This proves the importance of looking into a company’s background and finances — crypto or not — before allowing it to become bigger than Nasdaq, not after. Due diligence can help differentiate sound investments from terrible ideas between good crypto projects and bad crypto projects. And no, “he was on the cover of Fortune Magazine, he was a big name” is not due diligence. It’s falling for the oldest trick in the book.

Just spoke with an LP in several crypto funds: he said when he asked funds why they did “lazy” DD on FTX, they responded basically “he was on the cover of Fortune Magazine. He was a big name.”

There’s going to be a lot of lawsuits. And a lot of funds will shutter.

— Frank Chaparro (@fintechfrank) November 13, 2022

Because Bankman-Fried might have graced the cover of Fortune (then again, so did Elizabeth Holmes), but he proved his worth as an incompetent, incapable leader. He was nothing but a fraud. In a recent tell-all with a Vox reporter on Twitter, he admitted that “the ethics stuff” — read: his beloved philosophy based on philanthropic efforts and effective altruism — was mostly a front, as “it’s what reputations are made of.”

“I feel bad for those who get f–ked by it,” he added, a statement that’s hard to believe.

So, what comes next? Preventing this from happening again.

Knowing what we know now, it’s paramount that the industry as a whole get in “reputation management” mode and conduct a review of any remaining bad apples, for they cannot be allowed to cause the kind of damage that FTX did.

Crypto just wouldn’t survive it.

By giving innovative, science-backed and reliable projects more space and airtime and cutting off any emboldened fraudsters before they have the chance to make any more victims, the industry can allow new names to flourish and help bring the project back to its original mission. By ensuring that the names replacing FTX in the public’s collective understanding of what crypto is and stands for are absolutely foolproof, the industry can reinstate a golden standard of behavior and return to what it was intended to be.

The crypto ecosystem is at a crossroads: It can either innovate, regulate, review and begin again, or it will fail. The FTX saga is a sign that it’s time to make a choice.

It’s true FTX’s downfall was a shock to many: enthusiasts, investors, legislators and casual crypto-curious individuals alike. But, to put it plainly, it could be the best thing to happen to crypto. Only time will tell, and the world is watching.

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