Recently appointed chief exec of crypto exchange FTX, John J. Ray III, provided new insight into the firm’s collapse in prepared testimony on Tuesday.
At a US House Financial Services hearing on the subject, Ray explained that the firm seems to have failed due to “the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money.”
Ray specifically cites a variety of immense lapses in security at FTX, including that certain private keys — which controlled access to hundreds of millions of dollars worth of crypto — lacked adequate protection and were not encrypted.
Further, he explained that senior management had effectively unrestricted access to customer assets. FTX’s sister company, crypto investment firm Alameda Research, used customer funds for margin trading and lost a “significant portion.” It was effectively able to borrow without any limits from FTX. Assets were commingled among portions of the group.
His team’s ongoing efforts to salvage FTX and its various entities was described as a “herculean task.” Over $1 billion in assets have been secured by his team so far, in a race to find customer funds. However, Ray reiterated that documents pertaining to nearly 500 investments were missing, and cited the lack of audited and reliable financial statements as one of his team’s challenges.
The testimony also provides insight into where the missing funds have gone. Most customer assets were given to Alameda — $5 billion was splashed on “a myriad of businesses and investments.” Many were worth only a “fraction” of what was paid, Ray said. Many are now worthless.
FTX’s Ray responds to Bankman-Fried’s comments
Through bankruptcy proceedings, Sam Bankman-Fried has repeatedly questioned Ray’s decision to include its American arm, FTX US, in bankruptcy filings. The curly haired former billionaire claims that it was, in fact, solvent. Ray explained his decision — and doubled down on it.
“…FTX US was not operated independently of FTX.com. Chapter 11 protection was necessary both to avoid a “run on the bank” at FTX US and to allow our team the time to identify and protect its assets,” he explained.
“Since the time of the filing, I have become even more confident this was the correct decision.”