Introduction
It is important to note that the industry of cryptocurrency has always been volatile, high-risk, and scam-ridden since its start. It promises revolutionary financial changes and improvements; however, the last few years showcased its major problems, such as its fraudulent nature. The given analysis will focus on the FTX scandal by describing what it was, what was violated, and who was implicated. The core problems with FTX were the lack of transparency, failure of proper reporting, and abuse of its funds by its founder.
What Was It?
FTX was a prominent digital currency exchange platform, but the company faced a major downfall in the last year. Despite its rapid rise since its launch in 2019, it deservedly takes a spot as the biggest scammer of the 2020s because it engaged in a massive fraud, which led to a scandal. The company was essentially valued at $32 billion by January 2022; however, since then, it saw billions lost by its customers and investors in November of the same year (Hetler, 2023).
The relevant investigations by the authorities revealed that customer funds were directed to accounts held by Alameda Research and not FTX. In addition, CoinDesk published an exposé in which it detailed how Alameda Research relied heavily on FTX’s digital token – FTT. As a result of such shady operations, it was exposed that there was a disparity of $8 billion between liabilities and assets (Hetler, 2023). The balance sheets of FTX were neither audited nor in compliance with standard financial reporting procedures.
How Did They Violate the Law?
FTX and its sister companies failed to produce balance sheets properly reflecting standard financial reporting procedures, which is a violation of Financial Reporting Standards or FRS. The balance sheets remained unaudited due to the company’s private status, and they showed inconsistencies in asset declarations (Hetler, 2023). In addition, Bankman-Fried – the founder of FTX – was accused of using the platform’s funds for extravagant advertisements, political donations, as well as personal luxuries. The intercompany transactions also lacked formality by allowing a free transfer of liabilities and assets without proper documentation, which is a violation as well (Hetler, 2023). A last key breach of the law was the absence of security measures, such as multifactor authentication, and a problematic exposure of billions in crypto assets; hence, violations included the lack of audits, reporting, accounting, and risk management.
Did Anyone Get Caught?
Sam Bankman-Fried was the prime suspect since he was the founder and key beneficiary of the scams. This is why authorities arrested Bankman-Fried on December 12, 2022, for his involvement in the FTX scandal, and he faced a total of eight criminal charges (Hetler, 2023). After his arrest, Bankman-Fried secured his release through a historically high bond of $250 million, and authorities managed to recover $5 billion in assets by January 2023, while an estimated $3 billion remains unaccounted for (Hetler, 2023). As a result, FTX’s investors started a class action lawsuit against the company and its supporters because they were falsely representing the company’s health and deceiving them.
Conclusion
In conclusion, the founder abused FTX’s funds, the company failed to report its finances properly, and it was non-transparent, which were key violations that led to its downfall. The FTX scandal exemplifies the significance of transparency, ethical operations, and accountability in the digital financial world. In essence, the latter means that even towering giants in the cryptocurrency market, which are valued at billions, can fall from grace when integrity is compromised.
Reference
Hetler, A. (2023). FTX scam explained: Everything you need to know. TechTarget. Web.