Welcome to the penultimate newsletter of 2022!
Today, we will be discussing another lesson I have learnt this year. Interestingly, the ongoing FTX saga has done a lot to reinforce that lesson.
The bankruptcy of the crypto exchange FTX has helped me appreciate the need for accountability as well as the importance of checks and balances in all my dealings especially as relates to my finances.
For the sake of those still in the dark regarding the collapse of FTX; I’ll attempt a brief summary (based on currently known facts).
Until it declared bankruptcy on the 11th of November 2022, FTX was one of the world’s largest cryptocurrency exchanges. According to Investopedia, “a cryptocurrency exchange is an online marketplace where users, buy, sell and trade cryptocurrency.” They essentially allow users to trade cryptocurrency for cash or other digital currencies.
FTX was an umbrella company that had several subsidiaries owned by the principal actor in this mess – Sam Bankman-Fried (SBF) and his 2 co-founders. These companies were – FTX itself, a venture capital firm, Alameda its hedge fund and an international exchange.
FTX has (or had) an underlying token – FTT which offered certain benefits to users of the exchange. It was essentially a share in the exchange which the company was to buy back from its holders using part of its profit.
The problem started when one of FTX’s competitors, Binance (who incidentally was also an early investor in FTX) decided to liquidate his FTT tokens – $500 million worth of them.
This invariably led to a run on FTX as customers withdrew $6 billion within 48 hours which subsequently led to the need to declare bankruptcy.
Although that was the immediate cause, events after the fact have shown that the lack of proper corporate governance between FTX and Alameda was majorly responsible for the collapse.
For instance, it was discovered that Alameda never remitted to FTX value or cash for transactions done on its behalf. Remember that FTX as an exchange couldn’t receive money directly, so Alameda would receive such funds on its behalf.
However, rather than pass them on, Alameda traded with these depositors’ funds and mostly made a loss doing so. In fact, it lost $8 billion in 3 years.
If these funds had been ring-fenced as expected by regulatory standards, they ought to have been able to withstand the depositor run on it.
Also, the lack of a board of directors meant that there were no external parties advising SBF and his co-founders.
So for me, this entire incident serves as a reminder that best practice must be maintained at all times in all my dealing, financial or otherwise. That there is a need to have my personal oversight team as no one can truly do life without mentors or advisers.
Till next week, here’s wishing you a fantastic week.
Toyin Oguntuyi