The FTX bankruptcy, once valued at $32 billion and had a leading role in cryptocurrency, has spread unsteady financial industry tremors that exposed worrisome strategic management and imprudent business practices. SBF, a former CEO and founder, changed from being one character admired to another who is wanted for committing crimes and whose firm went bankrupt within just several days. The essay focuses on the strategic failures of FTX and SBF, showing how disastrous results are possible due to government errors, transparency deficiencies, and unethical behaviour. The vector of the bankruptcy experts indicated that the debts of FTX could have an approximate amount of around US$ 50 billion, plus the financial scandal of Enron. This bankrupt company had to declare liabilities that somehow exceeded that amount ($23 billion) (Cold Fusion, 2023). The collapse of FTX, once a leading cryptocurrency exchange, exemplifies the catastrophic consequences of strategic management failures, lack of corporate governance, unethical practices, and regulatory oversight in the crypto industry.
Lack of Corporate Governance and Oversight
One of the most clearly visible strategic management failures in the case of FTX was the need for strong corporate governance and regulatory mechanisms. FTX had no self-standing board, which meant that SBF had the power to dictate the company’s affairs during bankruptcy proceedings. (Joseph, 2023) This system, which allowed SBF to take extreme risks without proper levels of control, probably also fueled the ultimate wrong usage of customer funds and the absence of transparency in FTX’s financial affairs (Joseph, 2023).
The lack of accountability or supervision of SBF and his team at FTX enabled them to do some unfair activities that were not reviewed. The source claims that SBF was… entrenched in a tight inner circle of friends and intimate partners where most of them held essential roles in the very firm (Cold Fusion, 2023). Nepotism and the absence of impartial checks and balances allowed them to proceed with unqualified people and make important decisions, and the company’s downfall must be blamed.
Weak corporate governance provisions let the employees of those companies proceed with unethical practices that 87% of institutional investors, in turn, are disinterested in. It has been revealed by the survey of PricewaterhouseCoopers (PwC) that 87% of institutional investors consider governance to be a very significant factor when making investment decisions (PwC, 2022). Due to the absence of the appropriate governance frameworks, FTX skipped all the channels of bringing trust and responsibility to the investors, which finally caused the investors to lose confidence and damage the entire ecosystem.
Failure to Maintain Proper Recordkeeping and Accounting Practices
The strategic management failures of FTX also encompassed its disarrayed bookkeeping and records management procedures, which resulted in a disconcertingly haphazard audit and verification process. In the initial screening, the bankruptcy team discovered that the company needed to keep the official records, using employees to communicate via informal Slack channels (Joseph, 2023). There needs to be a system of accounts and record-keeping to verify the placement of funds with precision. This is one of the biggest problems that led to the end of the financial system.
Additionally, FTX won QuickBooks, the software used for accounting by small businesses, despite having billions of dollars as a company (Joseph, 2023). The decision of FTX management to engage with the accounting software that needed to be improved for a firm of the organization’s size and complexity could have been more strategic, leaving no doubt about the poor implementations by the finance team of proper reporting and systems controls.
As a result of FTX’s poor recordkeeping and accounting procedures, dire consequences were experienced not only for its investors but also for the whole market. ACFE, The Association of Certified Fraud Examiners, revealed that there are common factors in the space of insider fraud, and they are regulatory deficiency and imperfection in accounting systems, which account for about 5% of an organization’s annual revenue loss worldwide (ACFE, 2022). Underestimating the importance of proper record keeping and implementing the accounting foundations, FTX invoked fraud and was exposed to tremendous fiduciary risks and disputes.
Commingling of Customer Funds and Risky Trading Activities
The most atrocious mistake of strategic management at FTX was mixing customer funds with the trading operations of Alameda Research, a digital currency hedge fund owned by SBF. Based on the U.S. Commodity Futures Trading Commission (CFTC) reports, FTX and Alameda “both secretly and wrongly transferred billions of dollars from FTX customers to the Alameda account” (CFTC, 2022). Some experts claim that these funds were used to finance high-risk transactions and rapidly depleted the users’ equity, emphasizing eroding the cornerstone principles of market confidence and security, thus causing the company’s downfall.
Besides violating standard practices, the intermingling of proprietary trading with customer funds also created a threat to the judiciary and a loss of reputation. It was clear from the study conducted by the International Organization of Securities Commissions (IOSCO) that the misuse of customers’ funds is the main reason for investor protection. Ultimately, the investor’s trust in the reliable market operation can be questioned (IOSCO, 2021). The act of not segregating client assets and the transactions undertaken by the exchange, FTX, undermined the security of client funds and confidence, which led to a large-scale migration of clients during the liquidity crisis.
The commingling of funds between FTX and Alameda was alleged to have led the FTC to presume that the two entities misappropriated over $8 billion of customer funds (Joseph, 2023). This terrifying amount of capital loss underlines the strategic management failure and attention the Securities Exchange Commission or any other regulating agency may pay to SBF and its associates. What goes along the collapse of fiat capital pools led to widespread investor and trader losses, resulting in a drastic reduction of social acceptance and loss of trust.
Lack of Transparency and Misleading Communication
SBF and FTX’s failure in strategic management was further boosted by a need for more transparency and credible communication before and during the potential case. When the CoinDesk report about Alameda’s balance sheet appeared in the headlines, SBF did not react promptly. On the other hand, after the tweet had been posted, he removed it, which implied that the corporation’s outstanding financial problems were much more significant than depicted. On the one hand, this opacity and conditionality of the communication led to the collapse of customers’ views and, on the other hand, caused the panic that finally destroyed the company.
Transparency and proper communication are the hallmarks of strategic management that work, especially in crisis periods. The HBR referenced research that showed businesses prioritizing transparency and open communication throughout crises were more likely to retain the confidence of stakeholders and emerge stronger from the situation (Sucher & Gupta, 2019). The SBF and FTX leaders are now crumbling under public outrage. This is the direct consequence of the opaque and unclear financial information they kept from the public for a very long time, which eventually fuelled conspiracies and exacerbated the very liquidity crisis they are in right now.
The implications of these issues were not just limited to the immediate crisis but also covered communication that FTX misled. Edelman Trust Barometer survey – a trust forcing 76% of respondents report lack of transparency as a main trust-breaking reason (Edelman, 2022). As it ignored the foundations of openness and honest communication, FTX rejected the trust of market stockholders not only for the crypto industry but also for digital asset acceptance, which was triggered by its unexpected failure.
Conflicts of Interest and Nepotism
Ethical issues, such as conflict of interest and nepotism, exacerbated failures in FTX’s strategic management. In the published reports, SBF surrounded himself with a tight circle of friends and love interests, many of whom belonged within the organization’s positions (Cold Fusion, 2023). They are commonly called the “crypto kids,” their lack of experience and questionable governance during the Arbitrum trading controversy was exhibited by the words of Caroline Ellison, the director of Alameda Research, as stated by Joseph (2023).
The manifestation of conflicts of interest and nepotism within the leadership of FTD not only bent down corporate governance but also led to the collapse of the system’s ethics. An article published by Ivanyna and Salerno (2021) posited that conflicts of interest can consequently influence biased decision-making, misallocation of resources, and lack of faith by the public in institutions. Following such routes and observing personal connections and loyalties that affected the choice of critical figures and how their connections with the company played out, the integrity of the FTX brand was undermined, with a considerable risk of operational and reputation losses.
Lack of Risk Management and Oversight
A significant strategic management mistake that FTX made was the need for precise risk management and control functions. The latest reports state that SBF and his close team needed to make better-probability decisions with no prior risk evaluation or mitigation strategy (Cold Fusion, 2023). Widescale risk management and lack of control mechanisms led to compounded company growth, eventually leading to its current failure. The proof is that risk management alone is not enough for the business; it should begin with developing robust practices, and the World Bank asserts that companies with solid risk management practices experienced 25% higher revenue growth and 16% higher profitability compared to their peers (World Economic Forum, 2020).
Limited supervision and oversight in terms of risk management on the part of FTX went hand-in-hand with the fact that all the technical knowledge required for the operation of the exchange was concentrated among a small number of individuals, such as Gary Wang and Nishad Singh. As Brett Harrison (the ex-president of FTX US) affirms, the anonymity behind this fictional nickname suggests that they most likely penned more than 90% of the codes for trading platforms (Joseph, 2023). Due to a specific dependency on a small group of individuals for this exchange, operation risk became significant because if they were to get sick or busy for some reason, there could be an outage that would mean the platform would collapse and, in turn, worsen clients and investments.
There was a severe pitfall during FTX’s lack of risk management and inadequate oversight. A report by the International Monetary Fund (IMF) theorizetheorizese financial sector’s slack financial management significantly contributed to the global financial crisis of 2008 (IMF, 2019). Likewise, the adoption of risk management at FTX never happened, which allowed employees to do things as they pleased. However, the result was the total collapse of the whole thing and even the loss of millions of customers’ cash. The aftermath of FTX’s failure has had little influence on the cryptocurrency industry as regulators, policymakers, and the cryptocurrency community, in general, started to advocate for applied oversight, rigorous risk management, and other preventive arrangements to avoid history repeating itself.
Failure to Adapt to Changing Market Conditions
A significant strategic management mistake that FTX made was the need for precise risk management and control functions. The latest reports state that SBF and his close team needed to make better-probability decisions with no prior risk evaluation or mitigation strategy (Cold Fusion, 2023). Widescale risk management and lack of control mechanisms led to compounded company growth, eventually leading to its current failure. The proof is that risk management alone is not enough for the business; it should begin with developing robust practices, and the World Bank asserts that companies with solid risk management practices experienced 25% higher revenue growth and 16% higher profitability compared to their peers (World Economic Forum, 2020).
Limited supervision and oversight in terms of risk management on the part of FTX went hand-in-hand with the fact that all the technical knowledge required for the operation of the exchange was concentrated among a small number of individuals, such as Gary Wang and Nishad Singh. As Brett Harrison (the ex-president of FTX US) affirms, the anonymity behind this fictional nickname suggests that they most likely penned more than 90% of the codes for trading platforms (Joseph, 2023). Due to a specific dependency on a small group of individuals for this exchange, operation risk became significant because if they were to get sick or busy for some reason, there could be an outage that would mean the platform collapse and, in turn, worsen clients’ and investors’ conditions.
There was a severe pitfall during FTX’s lack of risk management and inadequate oversight. A report by the International Monetary Fund (IMF) theorizetheorizese financial sector’s slack financial management significantly contributed to the global financial crisis of 2008 (IMF, 2019). Likewise, the adoption of risk management at FTX never happened, which allowed employees to do things as they pleased. However, the result was the total collapse of the whole thing and even the losses of millions of customers’ cash. The aftermath of FTX’s failure has had little influence on the cryptocurrency industry as regulators, policymakers, and the cryptocurrency community, in general, started to advocate for applied oversight, rigorous risk management, and other preventive arrangements to avoid history repeating itself.
These supervisors in leadership positions at FTX were also faulty because they were not proactive regarding changes in market dynamics and upcoming risks within the cryptocurrency space. It can be noted that cryptocurrency and the industry are still at an infant stage with high volatilities caused by the short life span of the market and the constant challenges coming with it. FTX needed to be more complacent about their setting up and ongoing business model and practices as the change was brought about. The inability of the management to remain flexible and agile enough to stumble through the tumultuous business environment, such as the liquidity constraints, surprisingly resulted in the company’s downfall. Influential companies are known to track changes in the external environment more closely. They, therefore, adjust based on the approach they feel will work best and always adopt the strategies that are suitable when required. In this way, they stand at the risk of lower risks and capital opportunities emerging. FTX’s inability to maintain the momentum and swiftness required in those situations are the components that led to their death.
Unethical Business Practices and Potential Fraud
The catastrophe for FTX was attributed to strategic management failures and accusations of illegal conduct and fraud. As the case by the U.S. Securities and Exchange Commission (SEC) indicates, “SBF and his fellow conspirators plundered billions from FTX customers” (Joseph, 2023). Customers’ funds were perceived to have been improperly taken, the FTT token’s price was repeatedly manipulated, and there was no clarity about the pooling of funds between FTX and Alameda, which posed credibility questions and potentially presented fraud activities.
Fraud and immoral business practices infringe on the law and regulatory framework and engender the principle of keeping faith and integrity of the money system. Based on the study of ACFE, the business sector suffers an average of 5% annual revenue loss because of fraud; the cryptocurrency sector is especially subject to it due to its poor understanding of fraud and lack of governing oversight (ACFE, 2022).
FTX’s undesirable outcome on the sector, due to unethical business practices and potential fraud activities, took its toll on the entire sector. In addition to the immediate financial losses that customers and investors undergo, the accusation of fraud substantially damaged the public trust in the cryptocurrency industry. It has not only affected its sustainability in the long run but also has deterred the industry from the path of integration into conventional financial systems.
The fraud allegation and mismanagement of customers’ money concerning FTX led to a call for enhanced internal control mechanisms, auditing, and a policy on the segregation of duty in the cryptocurrency exchange and related establishments. Protecting clients’ assets, following ethical rules, and ensuring transparency in the business require that relevant regulations be formulated. Community monitoring of third-party audits to confirm the commitment and instil behavioural change, like building trust with stakeholders, is also imperative. Notwithstanding, excellent influential outcomes from advancing suitable governance structures are another salient item on which we should put more weight in striving to have a sustainable ecosystem for the crypto industry.
Conclusion
The FTX crisis highlights the urgent need for active crypto regulation and conclusive enforced laws to govern and control cryptocurrency operations by the mining authority. Finding this golden mean between the needs of innovation and investor protection rights, in this case, is a tough job, and the task takes work. The FTX event reveals that participating in self-regulation is necessary to indicate what activities can be regulated and monitored and who might misuse this regulation. The ultimate impediment of FTX to business lies in the fact that the advice resonates among all companies, not just the publicly traded ones. The assistance of the organisation in improving regulations, such as good governance, ethical behaviour, and strategic adaptability, are all features that can help firms reduce risks and ensure that stakeholder trust is maintained and that firms are competitive in the evolving business environment.
References
Association of Certified Fraud Examiners (ACFE). (2022). A Report to the Nations ® OCCUPATIONAL FRAUD 2022: A REPORT TO THE NATIONS. https://www.acfe.com/-/media/files/acfe/pdfs/rttn/2022/2022-report-to-the-nations.pdf
ColdFusion. (2023). The FTX Disaster is Deeper Than You Think. Www.youtube.com. https://www.youtube.com/watch?v=20BEJouWBgY
CTFC. (2022). CFTC Charges Sam Bankman-Fried, FTX Trading and Alameda with Fraud and Material Misrepresentations | CFTC. Www.cftc.gov. https://www.cftc.gov/PressRoom/PressReleases/8638-22
International Monetary Fund (IMF). (2019). Global Financial Stability Report. IMF. https://www.imf.org/en/publications/gfsr
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International Organization of Securities Commissions (IOSCO). (2021). https://www.iosco.org/library/pubdocs/pdf/IOSCOPD750.pdf
Sucher, S. J., & Gupta, S. (2019, July 16). The Trust Crisis. Harvard Business Review. https://hbr.org/2019/07/the-trust-crisis
Boston Consulting Group (BCG). (2021, April 27). The 2021 Value Creators Rankings. BCG Global. https://www.bcg.com/publications/2021/interactive-tsr-value-creator-rankings-2021
Edelman. (2022, January 18). 2022 Edelman Trust Barometer. Edelman. https://www.edelman.com/trust/2022-trust-barometer
Joseph, J. (2023, October 2). The Collapse of FTX: Insiders Tell All. CNBC. https://www.cnbc.com/video/2023/10/02/the-collapse-of-ftx-insiders-tell-all.html
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