‘Hubris, incompetence and greed’ led to FTX’s demise, debtors say

In a Sunday report, the debtors of the now-defunct crypto exchange FTX revealed how “hubris, incompetence and greed” had led to the company’s collapse.

The 39-page report, filed with the U.S. Bankruptcy Court for the District of Delaware, explained in detail the control failures at the exchange on the part of Bankmad-Fried and top executives.

John J. Ray III, FTX’s new CEO and chief restructuring officer, said the company released the report “in the spirit of transparency” during a press release on Sunday, April 9.

The report was based on a comprehensive review of terabytes of FTX’s electronic data — reviewing over one million documents and interviews with 19 former FTX Group employees.

The report was compiled by a team of experts in legal, forensic accounting, blockchain, restructuring, computer engineering, cybersecurity, cryptography and other fields.

Lack of control

The debtors claimed that FTX lacked basic financial and accounting controls, suppressed dissent within its ranks and often made jokes about losing track of millions of dollars of assets.

“While the FTX Group’s failure is novel in the unprecedented scale of harm it caused in a nascent industry, many of its root causes are familiar: hubris, incompetence, and greed,” they said.

FTX was established in 2019. During its peak, FTX garnered more than one million users, with a base in the Bahamas.

Its collapse was swift — from being worth $32 billion in early 2022 to filing a Chapter 11 bankruptcy on November 11, 2022, after suffering from a week of a liquidity crisis. Not long after, the company’s top executives faced criminal charges.

FTX co-founder and former CEO Sam Bankman-Fried pleaded not guilty to fraud charges and campaign finance law against him. He will face trial in October.

Meanwhile, former CEO of FTX’s subsidiary Alameda Research Gary Wang and former engineering chief Nishad Singh have pleaded guilty and are assisting prosecutors.

Report’s key allegations

The report mentioned three key allegations — a lack of management and governance controls, financial and accounting controls, digital asset management, information security and cybersecurity controls.

Bankman-Fried, Singh and Wang allegedly played the biggest part in the management and governance of FTX. The company also had no independent or experienced personnel in various departments, from finance, accounting, human resources and information security to internal audit functions.

The report claims that FTX entrusted nearly all its accounting functions to a small external accounting firm. However, the company lacked specialist knowledge in cryptos or international finance markets.

“There is no evidence that the FTX Group ever evaluated whether its outside accountants were appropriate for their role given the scale and complexity of the FTX Group’s business,” the debtors said.

The company obtained approval for expenses and invoices worth tens of millions of dollars through the informal messaging system of Slack, with responses being merely emojis. This resulted in insufficient records of such transfers or even no record at all.

The report concluded that FTX stored almost all of its cryptocurrency assets in hot wallets that lacked multi-factor authentication, making them vulnerable to theft.

Daily reminder: use 2FA! 90% of crypto security is making sure you've done the basics.

Ideally you should:

a) use the 6-digit 2FA codes, NOT SMS
b) use withdrawal passwords or IP-whitelisting for withdrawals etc.
c) don't re-use passwords from hacked accounts

— SBF (@SBF_FTX) September 12, 2019

The debtors found this ironic, as Bankman-Fried had publicly talked about the importance of Two-factor authentication for crypto security on Twitter.

The debtors have managed to retrieve digital assets worth over US$1.4 billion, putting them in safeguard in cold storage. Another US$1.7 billion has been identified and is currently undergoing the recovery process.