Corporate Governance failures: Lessons learned from FTX and Similar Events

Crypto remains a developing currency growing in leap bounds. As such, it is susceptible to different situations that warrants holders, investors and traders to have their ears to the wall and be on their toes.

The rise of decentralized finance (DeFi) brought about significant innovation to the crypto industry but also brought with it increased risk for investors. As more investors and traders pour money into these platforms, the need for proper corporate governance becomes even more crucial. This is where the recent events surrounding FTX, Silvergate, and similar platforms come into play.

In this article, we will explore some memories down the lane and lessons learned from the collapse of FTX and similar events, including the importance of proper risk management, and transparency in decision-making as well as regulatory challenges faced by the crypto industry and potential solutions to address them.

What is Crypto Corporate Governance?

You might want to ask what is corporate governance or why crypto corporate governance is important.

Crypto governance is a set of rules, regulations, and practices that direct the decision-making and day-to-day operations of businesses engaged in the cryptocurrency sector.

Crypto governance best practices are those policies that accommodate transparency in crypto financial reporting, clear communication of company policies and procedures, adherence to crypto regulatory requirements, and active engagement with stakeholders.

Therefore, as stakeholders, your interest should be engraved in the mind of the board of directors of these crypto companies, or else you might lose a lot of money before you blink.

Let us take a quick look at some events where crypto governance has failed.

FTX Rug Pull

The FTX big bang scandal in the crypto community is a big pointer to corporate failure and crypto governance vulnerabilities. The scandal that occurred  in December 2021, shows a lot of vulnerability in the exchange’s governance system. The FTX collapse shocked the volatile crypto market, losing billions at the time, falling below a $1 trillion valuation.

The company board of directors were involved in unethical practices such as trading without express client consent and combining customer money with counterparties according to Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

Also, following the scandal development, one of the first to sell his FTT holdings, at about $500 million, was Binance CEO Changpeng Zhao. The value of FTT fell as investors fled their investments in a panic ($6 billion was removed in just 72 hours).

Bankman-Fried, the co-founder of FTX used an unnoticed “backdoor” to divert billions of dollars’ worth of customer funds to his own trading company, Alameda.

FTX was guilty of compromised systems integrity, faulty regulatory oversight, no centralised control of the cash handled, an inaccurate list of bank accounts and account signatories, inaccurate bookkeeping, luxury purchase made by employees in the organisation and inaccurate registering of these assets with government authorities.

The saga depicts that poor governance can effectively end any corporation, regardless of size. Larger businesses really entail more risk because consequences of failure can be severe.

The Silvergate Scandal

One other event that dealt a big blow at the crypto world was the collapse of Silvergate, following that of FTX. While Silvergate tried to reassure investors and regulators, they also depicted some bright red flags.

According to Silvergate’s 2019 regulatory filling, which elaborated on the fact that its business strategy and vision diverge from that of a traditional lender, significant capital investment or crypto-related acquisition were not made to support this seismic shift in business models, leaving one to question if Silvergate had the personnel and infrastructure to operate a crypto bank.

Also, one of its governance crypto failures was lack of monitoring controls which resulted in money laundering issues.

Silvergate had a customer base increase from 20 crypto users in 2016 to more than 1,600 in 2022. Hedge funds, more than 100 onshore and offshore cryptocurrency exchanges, and businesses involved in token initiatives were some of these clients.

However, the transaction control overwhelmed the company and because there were no good corporate governance structures put in place, the company was exploited and some customers used the company’s assets for illicit purposes such as money laundering.

Celsius Crypto Scam

A similar event was that of Celsius. In one of our reports, the company board of directors were committing fraud, such as by increasing interest rates and using phoney testimonials, and manipulating the market to its own advantage and that of its insiders.

The company on a large scale failed in corporate governance because of its lack of transparency and focussing on short-term gains instead of sustainability and the interest of investors.

Coffezilla, of the most popular influencers on YouTube disclosed an instance that the company incurred losses of $800 million as of 2021 that were not disclosed to their investors after buying investors and customer money to pay employees as well as buy their own CELL token to create activity in the market.

Impact on the crypto community

All three events – the FTX Rug Pull, Silvergate Scandal, and Celsius Crypto Scam – share a common theme of governance failure and lack of proper controls, leading to significant impacts on the crypto community. These incidents highlight the vulnerabilities and risks associated with the crypto industry, particularly in the absence of proper oversight and regulation.

The governance failures in these events include unethical practices by board members, compromised systems integrity, faulty regulatory oversight, inaccurate bookkeeping, lack of monitoring controls, and lack of transparency.

These failures have resulted in significant financial losses for investors, damage to the reputation of the companies involved, and a loss of trust in the broader crypto ecosystem.

The impacts of these incidents have been severe, resulting in the loss of billions of dollars in market value, the fleeing of investors in panic, and concerns among regulators and the broader public about the safety and security of crypto investments.

These events have highlighted the need for stronger governance and regulatory frameworks to mitigate risks and ensure the long-term sustainability of the crypto industry.

Need for Crypto Regulations

Regulation is necessary to provide a framework of rules and guidelines for crypto-related activities, ensuring that they are conducted in a safe and transparent manner.

Regulation is most important for the future of Blockchain and Cryptocurrency

This would help to mitigate the risks associated with the industry, improve investor confidence, and reduce the potential for fraud and criminal activity.

Regulation would also provide greater clarity on the legal status of cryptocurrencies and their use, helping to facilitate their integration into mainstream financial systems thereby allowing increased adoption and use of cryptocurrencies, potentially leading to greater financial inclusion and economic growth.

In addition, regulation would also provide a level playing field for businesses operating in the crypto industry, reducing the potential for unfair competition and market manipulation.

Final thought

The crypto world is interesting because it is evolving and full of many opportunities. It is also safe to say that because it is evolving, it is susceptible to risk. It is therefore important that crypto investors ensure that they keep abreast of happenings in the crypto world so as to avoid falling into the trap of events such as FTX and cohorts.

The need for regulations cannot be overemphasised. This will help put the crypto world and growth as a good stand as well as aid faster adoption, build trust and reliance.