KPMG examined the process that led to the bankruptcy of cryptocurrency exchange FTX, which is seen as the most high-profile fraud case in the USA in recent years. The research, published with the main message “Lessons and implications for shareholders in the crypto industry”, listed the main reasons that led to the collapse of FTX under eight headings.
Founded in 2019, the cryptocurrency exchange FTX is one of the largest and most popular exchanges for professional investors due to its rapid listing of tokens by 2021, its user interface and high liquidity (low spreads between buying and selling prices), although only two years have passed since then. had become. However, FTX started to experience liquidity problems last year and went bankrupt in the US in November. While the CEO of the company, Sam Bankman-Fried, who resigned from his post after the incident, was brought before the judge in the USA due to fraud allegations against him, a striking research came from KPMG on the collapse of the FTX stock market.
The “Fall of FTX” research, which was published with the main message “Lessons and implications for shareholders in the crypto industry” and examines the establishment, rise and fall periods of FTX in detail, also includes the reasons that led FTX, one of the most popular crypto exchanges, to bankruptcy. he listed. The main reasons that led to the collapse of FTX in the research were listed as the mixing of company and client funds, conflicts of interest, use of tokens as collateral, token amount and valuation, lack of corporate governance, lack of registration, limited supervision of third-party investors and lack of risk management policies:
Mixing company and client funds: It turned out that FTX lent billions of dollars in client funds to its sister company, Alameda Research. Giving client funds to others and dealing with them without permission is illegal under US securities law and violates FTX's own terms of service.
-Conflicts of interest: The collapse of cryptocurrency Terra (Luna) and stable coin UST in May 2021 caused Alameda to suffer losses in transactions it entered, as FTX was a background source of liquidation.
-Use of tokens as collateral: FTX's own FTT token was used by Alameda as collateral in leveraged transactions. Therefore, the value of FTT depended on the survival of FTX. When the price of FTT fell below $22, Alameda's loans were also liquidated as it was unable to repay its debts.
-Token amount and valuation: Balance sheet disclosures showed that FTX held a large amount of assets ($5,4 billion) in addition to investing in private companies. However, these assets consisted of low traded and diluted market value (FVD) tokens. These included FTT and Serum, whose fair values in liquidation scenarios were well below their claimed values.
-Lack of corporate governance: FTX's board of directors had no members representing third parties. Control; were in a very small group of inexperienced, uninformed, and potentially at-risk individuals.
-Lack of records: Inadequate infrastructure for financial reporting systems and corporate controls resulted in the inaccessibility of reliable financial information. Records of payments, employees hired, and assets purchased were missing. FTX did not have a functional accounting unit or CFO.
-Limited audit of third-party investors: Given the recent disclosures about the lack of corporate controls and financial information, it appears that leading investors have purchased shares in FTX after limited research. As a matter of fact, well-known private equity, venture capital, pension and state wealth funds have publicly announced that they have canceled these investments.
-Lack of risk management policies: FTX and Alameda lacked robust asset-liability and liquidity risk management policies. Investing customer deposits in illiquid investments and using these investments as collateral resulted in high borrowing.
“We protect companies and investors against risks”
Making an evaluation on the subject, Sinem Cantürk, Fintech and Digital Finance Leader of KPMG Turkey, underlined that most of the crypto currency exchanges are exchanges operating with a centralized finance approach, and underlined that these companies should pay attention to fair market pricing, regulatory compliance and protecting consumers.
Stating that KPMG helps institutions with solutions and services within the scope of central financial services, Sinem Cantürk said, “As KPMG, we provide consultancy on compliance with basic legal requirements such as storage and separation of customer assets, prevention of market manipulation and token due diligence, with our teams of experts who dominate the crypto market. From a corporate governance perspective, we review business activities for potential conflicts of interest, including controls to reduce fraud and prevent misuse of client funds. It also designs policies and procedures to be implemented in areas such as operations, finance, risk management and law; We prepare contingency, recovery and solution plans. While modeling liquidity, interest, market and credit risks, we offer Integrated Due Diligence services covering pre- and post-investment financial, technology, regulatory compliance, risk management, tax, HR and the like. In addition to all these, as a consultancy company that puts technology and digitalization at our center, we also conduct technical security assessments against common security threats in the field of cybersecurity, including vulnerability assessment, penetration testing and source code review. Thanks to the solutions and services we offer in many areas such as these, we protect the companies and investors we consult against risks, and act as a shield.” said.
“The bankruptcy of FTX has again exposed all the weaknesses of centralized exchanges”
Commenting on the subject, Economist Erkan Öz said: “According to CoinMarketCap data, the total daily trading volume of cryptocurrencies is approximately $27 billion. Only 7 percent of this volume occurs on decentralized De-Fi platforms. In other words, 93 percent of transactions in crypto assets take place in central institutions. Especially centralized trading platforms, called exchanges, do not have the high security standards brought by blockchain technology. More importantly, decentralized cryptoassets are managed by hard-to-change code in the software. But centralized cryptocurrency exchanges have to rely on administrators to comply with the law and make accurate risk assessments. The recent bankruptcy of FTX, on the other hand, revealed all these weaknesses of centralized exchanges. These centralized structures, built around decentralized assets, operate unsupervised because the necessary laws have not yet been enacted in many countries. The collapse of FTX shows us how urgent regulation is necessary for centralized crypto money institutions. Of course, the new regulations should aim not to completely destroy the crypto asset markets, but specifically to control centralized exchanges. For example, legislators may seek certain capital or reserve requirements, as in banking, or may require certain technical capabilities against cyber-attacks. Licensing may be an option. There is also a great need for legal regulations that will regulate the relations of all stakeholders of the sector. On the other hand, inspections and regulations may not be expected only by the public. Although the establishment of organizations similar to the credit rating system found in classical financial markets does not solve all the problems, it can reduce the risks at least to a certain level. Centralized crypto-asset trading platforms can come together and perform self-control, or they can also get consultancy services from private institutions by providing the necessary conditions.”
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