The FTX restructuring team has released its first report analyzing the management of FTX before its bankruptcy. The report points to significant failures in platform governance, finance and accounting, and cybersecurity. In this article, let’s discover together the summary of this 43 pages document which illustrates the lightness and the amateurism of Sam Bankman-Fried.
FTX managed with lightness and amateurism by 3 inexperienced individuals
A few months ago, FTX was one of the world’s leading crypto exchanges. Its CEO Sam Bankman-Fried had a public image as a philanthropist and a player committed to advancing the crypto industry. That all changed last November when the FTX empire collapsed and Sam Bankman-Fried implicated judicially. What could have caused this large crypto exchange to fail?
The team in charge of restructuring FTX has handed in its first report on the management of this platform before bankruptcy. This document filed in the Delaware Bankruptcy Court shows the internal flaws that led to the bankruptcy of FTX.
In terms of governance, the report indicates, among other things, that FTX did not have an appropriate organizational structure. At the time of FTX’s collapse, the exchange did not even have a list of its employees. The exchange was run with an iron fist by Sam Bankman-Fried and his two collaborators Nishad Singh and Gary Wang. This trio had unlimited power. Moreover, they were also unresponsive to advice. Several employees were forced to resign just for pointing out failures and calling for improvements.
Chaotic Financial Control
Before its bankruptcy, the FTX exchange managed billions of dollars and had millions of customers who engaged in at least 26 million transactions every day. However, no financial rigor was observed by the platform, the report notes.
In addition to the lack of qualified personnel, FTX’s financial operations were lightly managed. Financial reporting policies and procedures simply did not exist. All of FTX’s accounting activities were handled by QuickBooks, an accounting software package developed for small and medium-sized businesses. Because of the mismatch between QuickBooks and a large company like FTX, several major omissions were recorded in the company’s accounts. This is the case with over 80,000 FTX transactions not processed to date.
The report also delves into the privileges granted to Alamada Research by FTX. In particular, it notes that the hedge fund’s activities have been funded by FTX customer funds since mid-2022. FTX users did not agree to this loan and were not even informed of it as admitted Nishad Singh last March.
Security of funds on FTX was level 0
Despite the large number of users and volumes of transactions on its platform, FTX was lightly managing the security of its assets and those of its customers. In particular, the report reveals that FTX had virtually no dedicated cybersecurity plans or personnel.
To that end, FTX’s corporate and customer private keys were stored on media accessible to multiple people and easily hacked. For example, keys providing access to over $100 million in Ethereum (ETH) were stored on one of FTX’s servers with no access limits. Private keys to other FTX assets were stored on AWS Secret Manager, a cloud service provided by Amazon that is accessible by many of the company’s employees.
In addition, FTX customer funds were kept in hots wallets. Unlike cold wallets, which operate without an internet connection, hot wallets require the internet and are thus vulnerable to hacks. In addition, the report reveals that FTX had no multi-signature wallet.
FTX’s management was a disaster, and unfortunately there is no guarantee that other exchanges do not manage their customers’ funds as lightly. It is better to keep your funds in a decentralized wallet. Always remember that without your keys, you don’t have your assets.
I dream of a world where every citizen has total control over themselves, including their finances. I believe that Bitcoin is one of the tools that will achieve this revolution. Since 2019, I am learning about this cryptocurrency and spreading the word around.
