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Introduction:
FTX was a cryptocurrency exchange where people could buy, sell, and trade digital assets like
Bitcoin and Ethereum. It was founded in 2019 by Sam Bankman-Fried and was known for its
focus on derivatives and leveraged trading. It offered a user-friendly platform for individuals
to engage in crypto transactions, allowing them to invest in various cryptocurrencies and
derivatives. FTX was a preferred choice for many crypto investors for its wide range of
supported tokens and innovative features, including unique trading products like tokenized
stocks and prediction markets. The platform also gained popularity for its efforts in creating
a transparent and efficient trading environment, making it a preferred choice for many
crypto enthusiasts. At its peak, FTX was the third-largest crypto exchange, with a value of
$32 billion. (Al Jazeera, Timeline: The rise and spectacular fall of FTX 2022)

Risk Management Issues:

FTX collapsed in November 2022 because a report showed that its sister company, Alameda
Research, had most of its value in tokens from FTX. Its customers panicked and started
pulling their funds out of FTX, causing FTX to seek help from other companies to fulfill the
withdrawals. Binance initially agreed to buy FTX, but they backed out after looking into FTX's
money handling. FTX then faced a liquidity crisis, froze assets, reported a hack, and
eventually declared bankruptcy. The founder, Sam Bankman-Fried, got charged with
misusing customer money, leading to legal trouble. This affected the whole crypto industry,
showing the importance of good rules and safety measures. (Reiff, The collapse of FTX: What
went wrong with the Crypto Exchange?)
FTX encountered a series of risk management issues that played an important part in its
eventual declaration of bankruptcy. The absence of transparency in its operations,
particularly concerning financial practices and asset holdings, raised significant concerns
among investors and regulatory bodies. Compounded by the lack of a robust governance
structure, including a board of directors. FTX lacked proper oversight contributing to
missteps and financial mismanagement. Instances of unreliable financial statements,
diversion of corporate funds for personal use, and insufficient record-keeping highlighted
governance failures and a lack of internal controls. The organization's poor risk management
became evident through the CEO's acknowledgment of a complete absence of trustworthy
financial information, indicating a systemic failure in risk mitigation. Unusual financial
practices, particularly the significant reliance on FTX's native exchange token within its
affiliated trading firm Alameda Research, exposed the exchange to financial risks and
conflicts of interest. The reported hack following FTX's collapse hinted at potential
cybersecurity vulnerabilities, pointing to inadequacies in managing this critical risk. These
intertwined risk management issues collectively led to the breakdown of FTX's financial
stability and operational integrity, culminating in the decision to file for bankruptcy. The swift
and severe consequences underscored the imperative need for robust risk management
measures, transparency, and effective governance structures in the cryptocurrency exchange
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industry. (John A. Wheeler, What the FTX collapse tells us about the risks embedded in
cryptocurrency and Fintech)

How the risk could have been managed:

To mitigate the identified risks, FTX could have implemented several strategic measures.
Firstly, the establishment of a transparent and accountable governance structure, including a
board of directors, would have provided essential oversight and strategic guidance. Regular
internal audits, conducted by independent third-party firms, could have identified and
addressed weaknesses in financial reporting and operational processes. Diversifying assets
beyond a single cryptocurrency or token, coupled with adherence to regulatory standards
and reporting requirements, would contribute to a more better and compliant operational
framework. Robust cybersecurity measures, including regular vulnerability assessments and
secure coding practices, would have fortified FTX's defences against potential cyber threats.
Educating and training employees on risk management principles would have added a
vigilant workforce capable of identifying and addressing potential risks.

Conclusion:
To establish trust in the crypto market after the collapse of FTX, cryptocurrency exchanges
started implementing proof of reserves. This involves publishing a combination of
cryptographic and traditional audits that enable users to independently verify that the
exchange's asset coverage to liability is greater than one-to-one. This initiative aims to
provide transparency and reassurance to users about the solvency of the exchanges
(Acheson, After FTX: Rebuilding Trust in Crypto's founding mission 2022). In conclusion, FTX's
downfall serves as a caution for the cryptocurrency industry, emphasizing the critical
importance of risk management practices and transparent governance structures. The
collapse, triggered by a lack of transparency, mismanagement of financial practices, and
inadequate risk mitigation, underscores the need for cryptocurrency exchanges to prioritize
accountability. This highlights the necessity for the industry to adopt stringent risk
management measures, maintain trust, and ensure the long-term stability of cryptocurrency
exchanges.
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References:

Al Jazeera. (2022, December 13). Timeline: The rise and spectacular fall of FTX.
https://www.aljazeera.com/economy/2022/12/13/timeline-the-rise-and-spectacular-
fall-of-ftx

Reiff, N. (n.d.). The collapse of FTX: What went wrong with the Crypto Exchange?.
Investopedia. https://www.investopedia.com/what-went-wrong-with-ftx-6828447

Wheeler, J. A. (n.d.). What the FTX collapse tells us about the risks embedded in
cryptocurrency and Fintech. AuditBoard. https://www.auditboard.com/blog/the-risks-
embedded-in-cryptocurrency-and-fintech/

Acheson, N. (2022, November 18). After FTX: Rebuilding Trust in Crypto’s founding mission.
CoinDesk Latest Headlines RSS. https://www.coindesk.com/layer2/2022/11/14/after-
ftx-rebuilding-trust-in-cryptos-founding-mission/