FTX collapse – did investors get duped by dollar signs?

It has been reported that Bitcoin has dropped to a week-and-a-half low and dragged down other major cryptocurrencies, as the impact from the dramatic collapse of FTX continued to ripple through the market.

Julia O’Toole, CEO of  MyCena Security Solutions, talks about what this means for the crypto world.

She says:  “In the last few days, the investment community have been left shell shocked after the sudden collapse of the FTX Cryptocurrency Exchange. The seemingly fail-safe exchange was worth billions of dollars one day and nothing the next.

“How could this happen without any warning?

“Well, it turns out the investor community got well and truly hoodwinked by dollar signs.

“Investors threw money at a twenty-something-year-old guy with a business which they didn’t even understand, blinded by their fear of missing out on the opportunity to be involved in the crypto platform that was apparently going to change the world … Clearly that didn’t happen.

“This reflects on a topical trend that sees investors flock to where their peers go. They all want a piece of the lucrative pie and if their peers are making money, they want in on the action. There is no due diligence carried out to understand whether the platform, product or service is good, useful, ethical, or legal.

“This sends businesses booming, which lures small-time investors and customers into the game.  But, when an organisation fails, as what just happened to the FTX Exchange, it is not the institutional investors that suffer the most as they have a diversified portfolio, it is the small-time investors and customers who proportionally take the biggest financial hits.

“Yet, this trend of investing in what’s ‘hot’ without understanding the fundamentals doesn’t just happen in the crypto world.

“Investors are also clueless in the cybersecurity space.

“For years, investors have been attracted by the latest ‘next-generation software’, without ever really understanding how it works, or if it really improves cyber resilience.

“Take the example of network access tools. They all claim to secure employee credentials. Yet despite massive cybersecurity spend year after year, over 82% of attacks still use legitimate login and passwords. Except now with those single access tools, attackers can get to the crown jewels and infect the whole network faster just using one set of credentials. This signals that those investments do more harm than good.

“Despite this, investors continue to throw their money into those solutions, without understanding the fundamentals of the problems they claim to solve. In the end, it is always the customers and end-users who will pay the price of investing in those products because they are big, well marketed and make earth-moving claims to which they can’t stand up to.

“In cybersecurity, those failures have outsized consequences, from ransomware to business interruption to private data leaks.

“Investors have a critical role to play in driving innovation that will make people’s lives better in the future. It is time they take their job seriously and spend more time on understanding the real challenges companies are trying to solve and then verifying if it all adds up, rather than just participating in the next boom and crash.

“Otherwise, more FTX-like implosions will be on the horizon”

Tony Petrov, Chief Legal Officer at Sumsub, also comments on its implication for the crypto world.

He says: “As the crypto world is recovering from the FTX implosion, it is worthwhile to consider some questions that this event has uncovered. Can we believe cryptocurrency exchanges when they claim that they are stable, have enough assets, do not use customers’ funds in their own commercial operations, and implement grown-up corporate governance procedures? And, are there any objective standards to help evaluate the legitimacy of these assurances?

“The lack of AML & KYC controls can be an early warning sign that an exchange or vendor may have fundamental problems. For example, before FTX’s collapse, DAR, or Digital Asset Research (a crypto research firm), referred to “weak KYC/AML controls” in their finding that FTX is not a trustworthy exchange. FTX would later bring in KYC vendor Chainalysis to overhaul its KYC program. Still, the details of that collaboration and the precise nature of their work together remain unclear (Chainalysis has since appeared on the list of companies owed money by FTX in their recent bankruptcy filings).

“For so long, compliance procedures that were considered a cost rather than an asset are increasingly taking on the quality of a real and tangible asset. It can be expected that this component will become a number one due diligence item for venture funds investing in crypto fintechs. No one wants to be associated with disasters like Enron, Wirecard, and FTX.

“The adoption and implementation of effective third-party KYC controls are signs that a crypto exchange is governed properly. Companies putting business ahead of compliance should raise suspicion about their practices in general. Of course, no one is a saint, but sometimes revealing your omissions in compliance and paying for them in the name of your reputation in the future, as Bittrex did, is better than sitting and waiting for a black swan to overturn your closet with all the skeletons in it.

“In the mentioned Bittrex settlement, Bittrex had to pay 30 million dollars to the FinCEN and OFAC for systemic AML violations during their initial years of operation.”