A US congressional hearing has heard that the collapse of FTX, formerly the second-largest cryptocurrency exchange in the world, stemmed from a concentration of power in the hands of a small group of inexperienced individuals led by former CEO Sam Bankman-Fried, who failed to put in place controls to ensure the safety of people’s money.
FTX is under investigation after filing for bankruptcy a month ago. Bankman-Fried was taken into custody on Monday evening by authorities in the Bahamas and is likely to be extradited to the US.
As the hearing took place Bankman-Fried was charged with fraud, conspiracy to commit money laundering and conspiracy to defraud the US and violate campaign finance laws.
The eight criminal charges filed by the US attorney’s office for the southern district of New York on Tuesday follow civil charges brought by the US Securities and Exchange Commission (SEC) accusing the 30-year-old former billionaire of defrauding investors by building a company that was a “house of cards”.
At the hearing the new CEO of FTX John Ray III said: “The collapse of FTX appears to stem from absolute concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company entrusted with other people’s money or assets.”
Ray, an industry veteran who said he has worked with a dozen large-scale bankruptcies in his career, said he has “never seen such an utter lack of record keeping” at a company.
There were “absolutely no internal controls whatsoever," he said.
He added that record keeping at the company was primarily carried out on Quickbooks, accounting software targeted for small or mid-sized businesses.
Invoices were co-ordinated over messaging platform Slack.
“This is unusual in the sense that there was literally no record keeping whatsoever – an absence of record keeping,” he said.
No oversight, corporate controls
Ray said it will take “weeks and perhaps months to secure all the assets” of most creditors who lost funds in FTX.
“There were no corporate controls, no corporate oversight, no independent board,” he said. “The owners, business and senior management had virtual control of all the accounts and could move money or assets as they desired, undetected by customers.”
He added that it was going to be difficult to recover the more than $7 billion in lost funds from FTX, and that the process would take “months not weeks."
“At the end of the day, we are not going to be able to recover all the losses here,” he said. “There was money spent that we will never get back.”
Congresswoman and committee chairwoman Maxine Waters said: ““Rest assured that this committee will not stop until we uncover the full truth behind the collapse of FTX.”
'Old school fraud'
Congressman and incoming chair of the committee Patrick McHenry called the actions of FTX “old school fraud, just using new technology” but implied it does not implicate cryptocurrency at large.
Others were less sure. Democratic representative Brad Sherman, a tough critic of crypto, said he has been trying to ban crypto investments for five years. He said he believes crypto’s ultimate goal is to compete with the US dollar.
“My fear is that people will look at Sam Bankman-Fried as one snake in a Garden of Eden. But the fact is, crypto is a garden of snakes.”