A Brief Breakdown Of The FTX Collapse And How SupTech Can Help

On average, FTX’s daily volume in 2021 exceeded $12.5 billion. With over five million active users and a net income in 2021 that amounted to $388 million, the crypto exchange was one of the biggest in the world. However, its collapse over the course of just one week made it equally as notorious when it came to what went wrong.

From the exchange’s rise to its fall from grace and how it affected the industry and brought to light the value of regulatory technology, here’s how FTX left its mark.

The Rise Of FTX 

FTX Exchange was founded in 2018 by Massachusetts Institute of Technology (MIT) graduate and former Jane Street Capital international exchange-traded funds (ETFs) trader Sam Bankman-Fried.

According to Investopedia, FTX offered ‘a range of trading products,’ including derivatives, options, volatility products, and leveraged tokens, and spot markets in more than 300 cryptocurrency trading pairs. Bankless Times highlights the exchange’s glory days, noting that FTX’s daily volume in 2021 exceeded $12.5 billion.

The TechTarget article explains that the rise of FTX came to an end in November of 2022 when CoinDesk published an article stating that Alameda Research was heavily dependent on FTX’s token, FTT, with assets valued at $5 billion.

FTX’s balance sheet was leaked and showed there was a lack of diversification, and the two companies were tied too closely together. The balance sheet listed $9 billion in liabilities and $900 million in assets, with poorly labeled entries showing a negative $8 billion balance.”

The TechTarget post goes on to note that Alameda borrowed ‘as much capital as it needed’ from FTX, though it was later discovered that this funding was mostly from customer deposits.

According to Investopedia, FTX filed for Chapter 11 bankruptcy protection on November 11th, 2022, and Bankman-Fried resigned. “According to its bankruptcy filing, FTX, which was once valued at $32 billion and has $8 billion of liabilities it can’t pay to as many as one million creditors.”

Understanding What Went Wrong

In December of 2022, the founder and former CEO of FTX, Sam Bankman-Fried, was arrested by the US Securities and Exchange Commission (SEC) on eight counts of fraud, money laundering, and violation of campaign finance laws.

The SEC accused SBF of knowingly devising a scheme to misappropriate customer deposits through siphoning off the FTX investments into his sister company, Alameda Research LLC, and then attempting to conceal the movement of funds,” explained a DWF Group post.

In regards to what went wrong, the post goes on to highlight the fact that FTX’s current CEO, John Ray III, has told Congress that FTX had unacceptable management practices and that he has never seen “such an utter failure of corporate controls at every level of an organization.”

Regarding the factors at play in the fall of FTX, it’s important to note that there are several key issues that likely contributed to the company’s failure. The absence of proper internal governance, inadequate financial controls, a lack of experience in the executive management team, and the absence of effective due diligence are four key issues identified.

The Undeniable Value Of Regulation

While many may worry that a shift away from crypto would happen following the FTX collapse, regulation may be the key to building back trust. When it comes to regulation within the cryptocurrency sector, a FinTech Global article details the opinion of Remonda Kirketerp-Møller, Founder and CEO of Muinmos, who believes that once the sector sees regulation and trust the usage will increase.

Before MiFID, financial institutions didn’t really fall under a category. They were regulated in some parts of the world but not all. The first MiFID directive was virtually the first real regulation for investment firms, creating a stronger focus on investor protection. So, for crypto, regulation will create a more solid governance structure and greater trust around the sector.”

Bovill.com also highlights that the FTX collapse has pushed global crypto regulation to the forefront, giving a brief insight as to what the future may hold on the subject.

Following the collapse of FTX, “the crypto industry should be expecting and preparing for the upcoming waves of legislation and rulemaking that are sure to impact the compliance and investment management programs of all broker deals and crypto advisers across the globe.”

A fintechhui.nz article explains how the FTX collapse brings to light the value of supervisory technologies or SupTech.

The site highlights a World Bank white paper from March of 2021 which lists four key purposes of SupTech, which include streamlining the collection and analysis of regulatory reporting information from supervised entities, capturing and extracting meaningful information from public complaints, monitoring non-traditional evidence sources (such as social media) for warning signs of emerging consumer risks and gathering insights from large quantities of unstructured tech.

A key capability of SupTech is that it can ingest many kinds of data, filter out all the noise — and there’s lots of it — and illuminate the narrative in the most efficient way,” notes the website. The post explains that SupTech uses artificial intelligence (AI) and machine learning techniques, which in turn work to streamline the process.

SupTech And Future Regulations

For those interested in cryptocurrency, the rise and sudden fall of FTX can be worrying, particularly due to the fact that it brings to light an undeniable need for regulation within the sector.

From the general push of regulation that the company’s failure has brought to the forefront of the industry to the potential of SupTech technologies, there’s no question that the future will likely bring innovation and regulation to the sector.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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