FTX: Lessons for governance of crypto startups 

THE bankruptcy filing of FTX, made through its newly appointed chief executive officer, is a damning indictment of the company’s governance practices. John Ray III, a turnaround specialist with 40 years of experience, including in high-profile cases such as Enron, noted: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financials as occurred here”.

Governance missteps at FTX include not maintaining centralised control of cash or appropriate books and records, engaging in transactions afflicted by severe conflicts of interest, and the lack of any lasting records of decision-making. Such an outcome is attributable to the fact that the control of FTX was concentrated “in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals”, Ray said.

This is despite about 80 investors, including blue-chip ones, having poured in close to US$2 billion over two years. Institutions such as Sequoia and Temasek have already fully written down their investment in FTX. Several questions emerge. Why did FTX display dismal governance despite the presence of experienced venture capitalists and institutional investors? What lessons does the implosion of FTX offer regarding the governance of startups in the cryptocurrency sector? If there is one red flag to look out for, what is it?