The FTX Collapse Says A Lot About Silicon Valley Corporate Governance
Brand name investors threw money at Sam Bankman-Fried without even looking at the balance sheet
Image Credit: Focal Project JP/Creative Commons
The FTX collapse is the apotheosis of everything wrong with the cryptocurrency industry and Silicon Valley's lax attitude toward corporate governance.
In response to FTX’s failure, Binance announced an ‘industry recovery fund’. But, in the wake of Sam Bankman-Fried’s fall from grace, we’ve learned the company was run with little to no actual institutional investor oversight, while Bankman-Fried repeatedly admitted to fraudulent behavior in the weeks leading up to the crisis.
FTX’s leadership is now under investigation and possibly detained, in the Bahamas.
Contagion followed FTX’s collapse, of course, with investors moving US$3B in Bitcoin out of exchanges. Singapore moved ahead with banning crypto advertising and only promoting stablecoins. Justin Sun moved US$6M in stablecoins from TrueFi. At the same time, the Hong Kong-based exchange AAX suspended withdrawals over partner fears. In Nigeria, the web3 investment start-up Nestcoin, which held its day-to-day operational budget on FTX has begun layoffs.
The FTX disaster is less a one-time anomaly, and more a recurring phenomenon rooted in Silicon Valley’s bloated sense of genius and now-farcical extreme wealth…
Two days after FTX’s bankruptcy, Crypto.com CEO Kris Marszalek admitted the company had mishandled a US$400M transaction. Marszalek was quick to jump on a YouTube AMA to reassure clients that FTX’s collapse had a minor impact on the company and that it had a “tremendously strong balance sheet.” (In one of life’s little ironies, a study from Beyond Identity had Crypto.com “ranked as the best exchange for security.”)
But what remains bewildering is the more than 70 global institutional investors — including such heavy hitters as Sequoia Capital, Sea Capital, SoftBank, and Tiger Global — that agreed to Bankman-Fried’s “take it or leave it” offer to run FTX with little to no oversight. “Interested investors should “support him and observe,” one investor who heard the Bankman-Fried’s pitch told The New York Times.
"Investors plowed $1.9 billion into FTX since 2019, according to PitchBook," Institutional Investor recently reported.
It’s difficult to imagine these captains of industry would be foolish enough to throw good money after bad just on the say-so of an enthusiastic grifter, but the truth is, the FTX disaster is less a one-time anomaly, and more a recurring phenomenon rooted in Silicon Valley’s bloated sense of genius and now-farcical extreme wealth.
Bankman-Fried isn’t the first “wunderkind” to peddle bullshit into virtual billions, Elizabeth Holmes of Theranos, WeWork’s Adam Neuman, and Nikola’s Trevor Milton all tread this path before, often ending with similar results, give or take a criminal conviction or two.
And while Crypto enthusiasts will work to shore up the industry and keep investors calm, criminal and civil investigations and prosecutions will be pursued, fingers pointed and blame evenly distributed, it’s difficult to believe that the big investors will do any navel-gazing with regard to their complete dereliction of duty towards investors and shareholder or offer any mea culpa worth believing.
“But the problem is more fundamental than losing a bit of money,” Will Gottsegen wrote in The Atlantic. “Crypto was built on the idea that you shouldn’t have to trust banks with your money, that people should be able to hold it themselves, hopefully somewhere a little more secure than a mattress. And though you can still technically do that, there’s no guarantee that the value of your tokens won’t someday plummet to zero, thanks to the actions of a few rogue billionaires with outsize effects on the market. This is, transparently, a terrible deal, and a seeming betrayal of that dream of crypto utopianism — the vision of a future without shady intermediaries.”
It’s becoming more and more clear that collapsing crypto exchanges are less a result of bad business models; it’s a feature, not a failing, and that “shady intermediaries” like FTX are a conspiracy between a con man — the Bankman-Frieds and Holmeses of the world — and the marks — the institutional investors.
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