Another Enron or Lehman Moment? Unpacking the FTX Collapse

On November 11, cryptocurrency exchange FTX filed for bankruptcy after a tumultuous week of shocking revelations. The exchange, which just weeks before was seen as one of the “most stable and responsible companies” in the industry, imploded so quickly that it left “crypto insiders stunned.” The crypto firm’s sudden downfall is still reverberating through the finance world and its full consequences are yet to be determined.

The collapse left stakeholders, from investors to regulators, scrambling to understand what caused the unraveling and why red flags weren’t spotted earlier.?

In the wake of the scandal, reports shed light on irregularities ranging from alleged unchecked spending to classic accounting fraud. This has led commentators to debate if the FTX bankruptcy is to crypto what the Lehman Brothers collapse was to the 2007–2008 financial crisis, or whether FTX’s downfall is more aptly compared to the 2001 Enron accounting scandal.?

Let’s review the timeline of the events that led to the crypto firm’s implosion.

On November 2, a leaked balance sheet for Alameda Research, the trading firm of FTX founder Sam Bankman-Fried, unveiled Alameda’s heavy reliance on FTX’s digital coin FTT. This triggered suspicion about the independence of the two companies owned by Bankman-Fried. A later report revealed that in investor presentations, some of the same assets appeared simultaneously on both FTX and Alameda’s balance sheets.?

On November 6, FTX’s biggest competitor Binance announced that it is selling its entire FTT holding due to “risk management,” which caused panic and mass withdrawals among FTX customers. Two days later, Binance announced its intention to acquire the struggling FTX, only to back out of the deal the next day. On November 11, the embattled crypto exchange filed for U.S. bankruptcy protection and Bankman-Fried resigned as its CEO.

In just one week, FTX went from an industry darling valued at tens of billions to a massive failure that sent chills through the crypto world. Bankman-Fried, who had been hailed as the “crypto golden boy” saw his fortune plummet from $16 billion to zero.

After the bankruptcy filing, reports about FTX’s troubles kept surfacing. Reuters reported that at least $1 billion of customer funds have disappeared from the exchange and that Bankman-Fried secretly transferred $10 billion of funds from FTX to Almeda. According to the Reuters report, software engineers had built a backdoor into the crypto firm’s book-keeping system to conceal the transfer of funds to Almeda. What’s more, FTX was reportedly run as a “personal fiefdom” as the firm bought Bahama properties worth $300 million for Bankman-Fried, his family, and senior staff over the past two years.

Regulators seem to have taken notice of these irregularities. Media reported that U.S. prosecutors in New York have opened a probe into FTX. The U.S. Department of Justice, the Securities and Exchange Commission, and the Commodity Futures Trading Commission are also investigating the crypto exchange. And more recent reports reveal that FTX was on the regulators’ radar months before the scandal broke out.

So does the FTX collapse signal the downfall of crypto similar to the way the Lehman Brothers bankruptcy marked the 2007–2008 financial crisis? The jury seems to be out on this, as the FTX earthquake is still sending shockwaves across the finance world.

As for comparisons to Enron’s 2001 accounting scandal, some experts note that FTX’s fate shares a lot of similarities with that of the defunct energy company. Fortune cited former Treasury Secretary Larry Summers, who likened FTX to Enron: “Not just financial error but—certainly from the reports—whiffs of fraud. Stadium namings very early in a company’s history. Vast explosion of wealth that nobody quite understands where it comes from.”

The comparison to Enron seems appropriate, given that longtime bankruptcy attorney John Ray III, the man who led Enron after its collapse, has been appointed CEO of FTX after its bankruptcy. In fact, media outlets cited Ray, explaining that FTX is “unprecedented” in its governance failure, suggesting it tops Enron in that respect: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

So despite the high-tech industry in which FTX operated, its downfall seems to involve many of the same elements of classic slipshod accounting. And while former Treasury Secretary Summers calls for “more forensic accountants” within regulatory bodies, it might be wise for businesses to implement safeguards and entrust forensic accounting due diligence to impartial third parties to avoid getting dragged into scandals such as the FTX collapse.