How the FTX Crypto Bankruptcy Was Born From a Complete Lack of Accounting Controls

FTX Group, also officially referred to as FTX Trading Ltd., is a cryptocurrency company that is currently in the process of bankruptcy proceedings. In addition to previously operating as a cryptocurrency exchange, it was also a crypto hedge fund.

It was originally founded in 2019 and hit its stride just a few years later in 2021. At one point, it had over a million users and was considered to be the third-largest exchange of its type in existence.

My, what a difference a few years can make.

Over the course of a relatively short period of time, FTX Group went from being worth an estimated $32 billion to filing for bankruptcy. The founder, Sam Bankman-Fried, became one of the wealthiest people on the planet by the age of 30 during this period. Having said that, things have gotten so bad that there has been a negative ripple effect across the entire crypto space.

Not only are more people than ever doubting the validity of crypto, but Congress and the Securities and Exchange Commission (SEC) are currently investigating exactly what happened.

Now, as new information is revealed on a regular basis, we're getting a better picture of how everything reached this point - and the details certainly aren't pretty.

FTX Group: The Story So Far

While this isn't the only reason that FTX Group finds itself in its current position, a major contributing factor seems to be the fact that the organization didn't have an in-house accounting department of any kind.

Not only is that bad in an over-arching sense, but it makes things particularly tricky once bankruptcy proceedings have begun. Presently, FTX Group is now struggling to obtain accurate financial statements to be used moving forward. Most of what they already have "cannot be trusted," according to experts.

All of this makes it particularly more distressing that Sam Bankman-Fried and FTX Group misused customer funds. The fact that they lack trustworthy financial statements of any kind makes the mess difficult, if not impossible, to truly untangle.

One professional overseeing the bankruptcy proceedings is a man named John Ray III. He's been an insolvency professional for decades and he actually oversaw the liquidation of Enron earlier in his career. In a filing with the court, he indicated that the current status of FTX Group is "the worst case of corporate failure" that he had seen in the more than four decades that he had been on the job.

The proverbial "straw that broke the camel's back" in terms of the FTX Fund collapse happened when Sam Bankman-Fried used in excess of $10 billion of client funds to support his own hedge fund, Alameda Research. That fund had recently suffered losses after making a series of bets on cryptocurrency-related ventures that never ended up paying off. When that occurred, FTX no longer had the funds it needed to cover withdrawals. One of the currencies that it was trading, FTT, triggered a bank run. At that point, the writing was on the wall.

All told, the accounting-related issues that FTX Group embraced was a long one. Not only did they fail to keep proper books and records, but there were also no security controls in place to safeguard the digital assets it was holding for customers. Not only that, but officials used software to "conceal the misuse of customer funds" - something that more than shows intent to defraud. All accounting functionality was being outsourced to the point where organizational leaders didn't even have a proper list of their own bank accounts. It has even been suggested that there was no official list of people who worked for the company in the first place.

In the end, it's important to acknowledge that none of this is meant to underline some inherent negative aspect of cryptocurrency necessarily. As a form of currency, it can and does have a lot of potential when deployed properly. It's just that, as is often true in most industries, its success as a concept depends on the ability of the people at the forefront to do the right thing and to act with integrity.

Credit: Leon Neal / Getty Images News via Getty Images

In the case of FTX Group, that decidedly did not happen.

Now, cryptocurrency markets are in a plunge and consumer confidence is shattered. The extent of the long-term ramifications of these events remains to be seen, as things are largely still unfolding. But one thing is for sure - a general lack of accounting best practices, little in the way of control, and overall reckless behavior contributed to the type of meltdown that financial professionals will be studying for years to come.

Get in Touch with LLI

You can count on us for professional, timely and reliable tax and accounting services. If you’re ready to get started, just fill out this form and we’ll be in touch.

2515 Ocean Avenue, San Francisco, California

(650) 992-3003

info@llicocpa.com

How the FTX Crypto Bankruptcy Was Born From a Complete Lack of Accounting Controls

Sign up for our newsletter.

Get in Touch with LLI