Crypto had been having a tumultuous season. Still, to see household name FTX fall, came as a surprise to many. The much-discussed cryptocurrency platform was launched in 2019. By 2021, they reported revenues of $1.02 billion, a figure evidence of their exponential growth from $85 million the previous year. That soaring increase meant an exchanged volume of $719 billion by their 1.2 million users last year. FTX was huge and a worthy competitor for market leader Binance.

Recent rumours around the financial stability of the exchange meant that a large number of users withdrew funds. According to Reuters, $6 billion had been withdrawn in a 72-hour period. As a result, FTX was forced to look for a bailout, as the mass exodus of the platform users created an unmanageable pressure on their cash position. Initially, it appeared Binance responded to calls to come to the rescue, tweeting that they had signed a Letter of Intent for the acquisition of the troubled crypto player. Later those plans fell through during the due diligence process. 

The result is that FTX Group started voluntary proceedings under chapter 11, effectively declaring bankruptcy in the United States and is now placed under provisional liquidation in the Bahamas where they are headquartered. The Supreme Court of the Bahamas appointed two provisional liquidators from PwC on Monday. Criminal investigations are underway by both law enforcement for criminal misconduct and the Securities Commission of the Bahamas for breaching their laws.

The full picture is not yet known. In any case, there will likely be an eye watering amount of personal financial losses for a great many individuals, some of which are based in the UK. Now, a difficult question arises: why didn't we act, when everyone involved said we should have?

As events unfolded, the UK regulator, the Financial Conduct Authority (FCA), published a brief note on the matter in their news section. They reminded the public of two of their initiatives: Moneyhelper, a free resource offering guidance for consumers with financial concerns and InvestSmart, an £11m campaign where it looks to “help consumers make better-informed investment decisions and become smarter investors.” No doubt a well-meant effort, but equally feeble as it became apparent, that in this instance, they were ineffectual in protecting consumers from harm.

Crypto assets are dangerous. We’ve been hearing that for a good while now. It is said that the crypto industry is insufficiently supervised. The public opinion and regulators have been claiming that crypto is not secure. So why did no one act decisively and intervene? Was it making the statement for the sake of making it because it sounds about right or maybe because policymakers don't actually know what to do? Like how we sometimes can put off tasks we find hard to do? Whatever the case may be, no effective intervention ensued. 

Just this September, the FCA felt compelled to address the public with a cautioning note regarding the unregulated status of FTX which meant that consumers were “unlikely to get their money back if things went wrong.” Almost a bit like a parent telling you “not to come back crying later”. Merely warning and attempting to influence consumer behaviour is not enough for a regulator that claims to put the consumer at the heart of their work. The enormous potential for consumer harm in the case of a failure in the industry, should have prompted a more active approach to bring adequate measures. 

The FCA currently regulate the crypto sector as an anti-money laundering and counter-terrorist financing (AML/CFT) measure, as a crypto exchange assumes funds changing hands. The FCA requires firms operating in the UK to register with them. To achieve this registration, which 38 crypto players have managed to accomplish, applicants are required to show they have systems in place to pick up and prevent untoward money flows. They reported that nearly three-quarters of applicants have failed at showcasing effective controls or withdrew from the process voluntarily.

In April, the now Prime Minister Rishi Sunak voiced his ambition to make the UK a “global hub for crypto asset technology”. That came as plans were presented to, among other things, create sandboxes, form working groups and regulate stablecoins, a digital asset that remains stable in value as it is linked to a less volatile asset, such as gold or a fiat currency.

Last month they repeated their intention to bring elements of the sector under the Financial Services and Markets Bill and under their influence through the financial promotions regime. During their Annual Public Meeting on 12 October, the FCA faced a fair amount of questions regarding the crypto sector, suggesting that their plans may not be going far enough. 

Somewhat unsurprisingly, Binance's Changpeng Zhao - or CZ, called for regulation of the sector when he addressed the G20 group of nations on Wednesday. During an address to Parliament, the Bahamas’ Prime Minister Philip Davis, said that their regulatory intervention could not have prevented FTX from crashing down the way it did, a statement that should not be seen as an argument to discount regulatory intervention as a preventative measure altogether. However it holds some truth. It is fair to say that FTX crossed many borders in their operations, so that many nations and their bodies were served with a chance to step in. What’s more, when we look at what allegedly went on inside the walls of FTX, it starts to look a lot like plain and simple running a business very poorly.

Perhaps a too idealistic thought when considering the vast amount of funds circulating in this industry. But it still should not take regulatory intervention for an organisation to do honest and good business, nevertheless. It is worth pointing out the obvious: the main responsibility lies with the management of FTX. The noise around the eccentricity of the founder and Chief Executive Officer Sam Bankman-Fried - an image he himself worked on maintaining, makes for entertainment when we follow the developments in the matter. It still doesn’t do away with the fact that the organisation with over a million customers, had an entire management team at the controls.

They failed to implement good controls and lacked fruitful governance structures. Even if not everything we read is true, it clearly points to poor corporate culture and ethics. There was too much power concentrated in too few, inexperienced hands. The company did not even seem to keep appropriate books for its digital assets and used unsecured shared email accounts to access private keys. And with so much more of this coming to light, it is incomprehensible that no one at FTX stood up.   

When a scandal of this size erupts in a sector as controversial as crypto, we need to make it count for something by analysing the drivers and not - or no longer - waiting to act. So, what would be some of the lessons learned from this loud event?

First, we should learn why we never seem to learn. Because there are too many corporate scandals (think Enron or Lehman Brothers) to pick from in both newer and traditional sectors. It shouldn’t happen that huge corporations can be run in such an abominable way.

Second, it is an opportunity for organisations, irrespective of what sector they operate in, to take stock and enhance their efforts to make sure that proper controls are in place. Are you cultivating a corporate culture where a whistle blowing policy is not just a means to an end?  Unsightly practices must have a way of coming to the surface. Putting integrity at the centre when running of a business remains as relevant as ever. That should clear the path for strong governance structures, comprehensive policy, and effective controls.

And, finally, it is not unimaginable that regulators, including the FCA, will now need to intervene faster. They have a task in front of them to create a solid framework for the sector to operate safely in. The determination that three out of four businesses looking to operate in the UK fail at AML/CTF should have caught more attention, being an indicator of a systemic problem. They should learn to not let sleeping dogs lie and be prompted to delve deeper. Despite being so explicit about their intention to protect consumers from harm, in this instance, they have failed at doing that. An additional piece of work could be educating consumers, so they are better placed to navigate the future FTX, still to come into this world. 

It may well be too soon to raise the question. Still, here it goes: how can a group of over a million people bringing together hundreds of billions in capital to the same place, not realise the relative power that it gives them collectively and use that to expect more from institutions such as FTX - and the bodies that (should) have oversight? Let’s hope this time we use the events as a costly lesson to become more critical and vigilant. 

Will we learn? Hopefully we will.