3 - 5 minute read
A new report has emerged from the current leadership at failed crypto exchange FTX, revealing that former FTX US President Brett Harrison resigned last September after a “protracted disagreement” with CEO Sam Bankman-Fried and other members of his inner circle. Harrison had concerns about the way FTX US was being run, including the lack of appropriate delegation of authority, formal management structure, and key hires. When Harrison took these concerns to Bankman-Fried and Nishad Singh, former director of engineering, his bonus was reduced, and he was instructed to apologize to Bankman-Fried. These allegations are consistent with Harrison’s earlier statements made through Twitter, where he claimed that he was threatened and told that he would be fired and have his professional reputation destroyed if he didn’t retract the complaint and deliver an apology.
According to the report, another employee in the exchange’s legal department was summarily terminated after expressing concerns about Alameda’s lack of corporate controls, capable leadership, and risk management.
Over a 45-page report filed with the U.S. bankruptcy court in Delaware, CEO John J. Ray III revealed the control failures at FTX since he took over after the exchange’s collapse last November. FTX was run by Bankman-Fried and his circle of cronies, who cared little for organization or internal controls.
Reconstructing FTX’s balance sheet has been an ongoing, bottom-up exercise that continues to require significant effort by professionals because FTX’s leadership regularly lost track of accounts and didn’t bother to cash checks, which collected like junk mail. Even Alameda wasn’t clear on its own positions, let alone hedging or accounting for them.
According to the report, Bankman-Fried’s internal admissions to his employees often directly contradicted his public statements made either via Twitter or to the press. For example, Bankman-Fried preached the importance of two-factor authentication to his Twitter followers, saying, “Daily reminder: use 2FA! 90% of crypto security is making sure you’ve done the basics.” However, FTX failed to use two-factor authentication for its critical corporate services, including Google Workspace and 1Password.
Bankman-Fried’s public reassurances that the exchange used a “best practice hot wallet and cold wallet standard solution for the custody of virtual assets” contradicted the fact that FTX held the vast majority of its crypto assets in hot wallets at all times. This lack of security made it possible for a still-unknown hacker to take control of $432 million worth of crypto from various FTX-controlled wallets the night the exchange filed for bankruptcy.
The apparent lack of control and security failures at FTX highlight the importance of due diligence and risk management in the crypto industry. This report should be a warning to traders to conduct proper research on exchanges and choose ones with robust security measures and transparent management structures. Maintaining an adequate level of skepticism towards public statements and advice given by crypto influencers is also critical.