6 Lessons from the Fall of Cryptocurrency Exchange FTX
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” wrote John J. Ray III of cryptocurrency exchange FTX 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 knows what he is talking about. Having “over 40 years of legal and restructuring experience,” he has been brought in to manage the bankruptcies of Enron, Nortel, and now FTX, which filed for bankruptcy last week. “Nearly every situation in which I have been involved has been characterized by defects of some sort in internal controls, regulatory compliance, human resources and systems integrity,” he explained, but FTX’s situation is the worst he’s ever seen.
Yet FTX’s collapse was as unexpected as it was swift. As recently as September, the company was raising another $1 billion in investments, with a valuation of $32 billion. FTX bought the naming rights for the Miami Heat’s arena in March 2021, and, in August, FTX’s 30-year-old founder Sam Bankman-Fried appeared on the cover of Fortune magazine, which wondered whether he was “the next Warren Buffet.” Bankman-Fried personally owned assets worth $26 billion in March of this year. All of a sudden, not only is Bankman-Fried suddenly penniless, but approximately a million people who invested in FTX have reportedly lost $8 billion. How could the latest and greatest new thing suddenly go belly-up?
Bankman-Fried hit the big leagues in 2017 while trading the cryptocurrency Bitcoin internationally and soon opened his own trading house, Alameda Research. He founded FTX (“Futures Exchange”) in 2019 as a platform for professional cryptocurrency traders. Much of his fortune was built into these two companies, although he had others, and he continued to run both.
The decision to control both companies (with a relation similar to that between the NFL and an NFL franchise) may have contributed to the downfall of both. The two companies seem to have been intertwined to an unwise, if not illegal, degree. Apparently, the DOJ and SEC were investigating to determine “whether FTX improperly used billions of dollars of customer funds to prop up a trading firm that [Bankman-Fried] also founded, Alameda Research.” Additionally, “Alameda rests on a foundation largely made up of a [crypto] coin [FTT] that a sister company [FTX] invented,” reported cryptocurrency news outlet CoinDesk.
The convoluted relationship between Bankman-Fried’s companies was confusing enough, but the bookkeeping was even more concerning. The world’s largest cryptocurrency exchange, Binance, considered buying FTX, but when they got to look in the horse’s mouth, they backed out of the deal because its “issues are beyond our control or ability to help.” That was days before FTX totally collapsed.
In fact, it’s hard to imagine how FTX could have made its issues any worse. “Many of the companies in the FTX Group … never had board meetings,” summarized Ray. “The FTX Group did not maintain centralized control of its cash,” including “the absence of an accurate list of bank accounts and account signatories.” Its human resource records were so unclear that it has yet to “prepare a complete list of who worked for the FTX Group … or the terms of their employment” when bankruptcy was filed. Supervisors approved payment requests through a chat platform “by responding with personalized emojis.” Business communications used “applications that were set to auto-delete after a short period of time.”
Worst of all, Ray divulged, “corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors,” which did not appear to be loans or company assets. Does that mean executives were pocketing investors’ funds? It’s possible.
Bankman-Fried himself weighed in on Wednesday about what went wrong. “I was on the cover of every magazine, and FTX was the darling of Silicon Valley,” he said. “We got overconfident and careless.” FTX had also become engrossed in environmental, social, and governance (ESG) initiatives — which has become code for any left-wing cause you can imagine — “giving millions each year to launch” such causes as solar energy in the Amazon basin. “In the future, I’m going to care less about the dumb, contentless, ‘good actor’ framework,” he tweeted. “What matters is what you do — is *actually* doing good or bad, not just *talking* about doing good or *using ESG language*.” He told Vox in an interview that “ESG has been perverted beyond recognition” and condemned “this dumb game we woke westerners play where we say all the right shibboleths and so everyone likes us.”
In addition to social progressive causes, Bankman-Fried had also become heavily involved in overtly political causes, spending $40 million in the 2022 midterm elections. He donated to many politicians with a role in overseeing cryptocurrency regulation, but Democrats received 90% of his donations. Bankman-Fried was the second biggest donor for Democrats after George Soros.
The sudden rise and spectacular fall of FTX is a cautionary tale for everyone, but believers, in particular, can benefit by applying the wisdom of Scripture to this case study.
- Don’t Seek Sudden Wealth
“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it” (Proverbs 13:11). If it were simple or easy to turn a huge profit overnight, more people would achieve it. Get-rich-quick schemes seem too good to be true, and often they are. Many people who gain wealth hastily take advantage of the wealth of others, by force or fraud, without creating anything of value themselves. Whether we’re considering the lottery, gambling, investment, or business, Christians should not set their ambition on the alluring prospect of immediate riches.
Charlatans often target the elderly and deceive them with ludicrous guarantees to double their life savings in a year, while not demonstrating their ability to do so. If you don’t understand how a business venture makes its money, it’s quite possible that it doesn’t.
Instead, Christians should remember, “Disaster pursues sinners, but the righteous are rewarded with good” (Proverbs 13:21). The one who comes out ahead in the end is the one who was faithful with what he was given, instead of the one who climbed to the top by stepping on the faces of others. This doesn’t necessarily guarantee wealth in this world, but remember there is a world after this one.
- Don’t Trust Accumulated Wealth
Not all wealthy people acquired their fortunes crookedly. In fact, many Christians have become wealthy through hard work and good management of what God has given them. Yet, while work is good, and wealth can be a reward for honest labor, it shouldn’t be our ultimate goal. We should never allow our hearts to trust in riches. “Do not toil to acquire wealth; be discerning enough to desist. When your eyes light on it, it is gone, for suddenly it sprouts wings, flying like an eagle toward heaven” (Proverbs 23:4-5).
Consider the parable of the rich fool, when Jesus warned, “Take care, and be on your guard against all covetousness, for one’s life does not consist in the abundance of his possessions.” Like that fool, we could die at any time and leave all our possessions to someone else (Luke 12:13-21).
- Don’t Seek Celebrity
Did you notice how FTX’s decline began? Bankman-Fried “was on the cover of every magazine,” and then he “got overconfident and careless.” There’s a ready application to this, “Pride goes before destruction, and a haughty spirit before a fall” (Proverbs 16:18). If you consider the ultimate consequences rather than immediate benefits, you will conclude, “it is better to be of a lowly spirit with the poor than to divide the spoil with the proud” (Proverbs 16:19).
But Jesus goes further. “When you are invited by someone to a wedding feast, do not sit down in a place of honor,” he said. If someone more distinguished comes along, you’ll be demoted and thus humiliated. Instead, “go and sit in the lowest place,” so that the host will give you a better seat in front of everyone. “For everyone who exalts himself will be humbled, and he who humbles himself will be exalted” (Luke 14:8-11). Don’t just avoid pride; actively pursue humility.
- Don’t Trust Celebrity
Just because someone is famous doesn’t mean you should imitate them. In fact, the “success” they have attained may be something quite unenviable. Media outlets write about people who are “famous,” to the extent that readers may feel like they know someone they have never met. But if that person’s image is refracted through news articles, particularly those produced from an unbiblical worldview, they are likely inadequate evaluations of that person’s character — light on biblical wisdom.
Again, Proverbs gives a relevant example. “One pretends to be rich, yet has nothing; another pretends to be poor, yet has great wealth” (Proverbs 13:7). One appears on magazine covers as the latest whiz kid, but he goes bankrupt by age 30 and might go to prison. Another never achieves notoriety, but he provides for his children to go to college and generously supports his church and other ministries. Most importantly, he aims to employ his earthly wealth to lay up treasure in heaven. Which of these two individuals would you rather be?
- ESG Is a Charade
FTX’s legacy will be how mismanagement and malpractice cost roughly a million people a collective $8 billion. Yet, until its collapse, it played along as one of the “good guys,” supporting socially laudable causes and the right political candidates. When the chips landed, its founder was forced to admit that doing good was more important than talking a good game. James exhorts his readers, “Be doers of the word, and not hearers only, deceiving yourselves” (James 1:22).
ESG initiatives might convince the (left-of-center) public that a business is one of the “good guys,” but they don’t earn righteousness points with God. Jesus warned, “Beware of practicing your righteousness before other people in order to be seen by them, for then you will have no reward from your Father who is in heaven” (Matthew 6:1). Some Christians might consider spending money with some businesses over others because those businesses participate in more “just” causes. But don’t be too hasty; a business has a greater interest in appearing to do good than in actually doing good.
- Work Should be Productive
Finally, it’s wise to maintain a healthy dose of skepticism about cryptocurrency. It has some very passionate and enthusiastic supporters, as all new fads do, but I wouldn’t invest my entire fortune there. For one thing, while called “currencies,” cryptocurrencies lack a critical aspect of sound money, which is that it is a reliable store of value. In that respect, most cryptocurrencies behave more like speculative stocks, with wildly fluctuating values.
For another thing, cryptocurrencies lack any actual value in the real world. They consist of bits of data stored in a computer — bits of data that are not particularly useful for anything. Metals like gold and silver are valuable for many applications, but cryptocurrencies are not. Admittedly, paper dollars have little real-world value, but at least they are backed by the full faith and credit of the U.S. government, which means that, as long as the U.S. government is good for something, so are they. Many cryptocurrencies are not backed by any state (which is often presented as a selling point) — or really, not backed by anything. Some entrepreneurs have poured considerable time, money, and labor into developing, promoting, and producing cryptocurrencies, but it’s unclear whether any real people in the real world have been in any way benefited by this. Therefore, it’s unclear why cryptocurrencies are worth the millions of dollars that have been invested in them.
Christians have long believed that all legitimate work has dignity associated with it. God created Adam to work the garden, and we have been working ever since. This is one way in which we image God. Jesus said, “My Father is working until now, and I am working” (John 5:17).
But that work should actually be productive. Paul exhorted the thief to “labor, doing honest work with his own hands, so that he may have something to share with anyone in need” (Ephesians 4:28). He urged the Thessalonians to “aspire to live quietly, and to mind your own affairs, and to work with your hands, as we instructed you, so that you may walk properly before outsiders and be dependent on no one” (1 Thessalonians 4:11-12). He and his companions labored, “working with our own hands” in Corinth so that the teaching of the true gospel would not be confused with false gospels sold for money (1 Corinthians 4:12). The point is not so much to prefer blue-collar work before white-collar work — although both are honorable — but rather to endorse working hard, not slacking, producing something of value to society rather than eking a living off the charity of others. Work that produces good or services that benefit others actually creates value in the world, and we glorify God by working “heartily, as for the Lord and not for men” (Colossians 3:23).
When you work heartily, with your own hands, to grow your wealth little by little, while not making it an idol, the chance that you will become the next sensational failure, as FTX has become, is just about nil.
Joshua Arnold is a staff writer at The Washington Stand.