Most CFOs never liked crypto—even before FTX’s collapse

Good morning,

Crypto is unregulated and volatile. Its true worth is ephemeral. Investing in it is risky. In other words, for most CFOs it’s a total nightmare combination they’ve tried to stay far away from. (Most CFOs are unwilling to put it on the balance sheet.) Which has made the collapse of exchange FTX both a finance horror story—but also an ‘I told you so’ moment.

Last week, FTX, one of the largest cryptocurrency exchanges in the world once valued at $32 billion, and helmed by 30-year-old Sam Bankman-Fried, collapsed. The exchange filed for bankruptcy last week, and Bankman-Fried stepped down as CEO. He was a crypto star, championing crypto on Capitol Hill and creating high-profile business partnerships. For example, in October, Visa announced a long-term global partnership with the company with plans to expand FTX account-linked Visa debit cards in 40 new countries.

“The situation with FTX is unfortunate and we are monitoring developments closely,” a Visa spokesperson told me via email last week. Today, a spokesperson confirmed the following: “We have terminated our global agreements with FTX, and their US debit card program is being wound down by their issuer.”

“The market uncertainty doesn’t change our view that digital currencies and underlying crypto technologies have great potential for the future of financial services,” the spokesperson said.

FTX leadership structure

It’s unclear if FTX has a CFO. When taking a look at the leadership team, there isn’t one listed. I asked Dan Ashmore, a crypto analyst at Invezz, a London-based investment fintech, about his assessment of the company’s leadership. “FTX’s collapse was unique in that it transpired out of the tangled relationship between the exchange (FTX) and the trading firm, Alameda Research, both of which were founded by Sam Bankman-Fried,” Ashmore told me. “There is a reason there was no CFO at FTX— because the leadership structure was highly unusual, given Bankman-Fried essentially made all the decisions for both companies.”

FTX was “notoriously lean, with an employee count of only 75—even as it expanded so rapidly, being valued at one stage at $32 billion,” Ashmore says. “This pales next to rival exchange Coinbase, which had over 6,000 staff before laying off 1,100 earlier this year.”

As the result of a high workload, the former co-CEO of Alameda, Sam Trabucco, quit earlier this year, he says. “This left only Caroline Ellison, co-CEO at Alameda, and Bankman-Fried as the senior leaders, although the latter was very much the number one,” Ashmore says.

The FTX “debacle” can be attributed in part to a “bespoke management structure and lean headcount” with most of the legal and compliance team reportedly quitting, he explains. “There is no doubt that the aggressive leadership, concentrated power structure, and tangled relationship between FTX and Alameda could have been reined in with a more conservative and prudent leadership structure,” he says.

‘Poor internal labeling’

A finance team onboard could have provided the financial clarity Bankman-Fried needed when labeling bank-related accounts, for example.

“The full story here is one I’m still fleshing out every detail of, but at a very high level, I f***ed up twice,” Bankman-Fried wrote in a tweet last week. “The first time, a poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower.”

In an analysis, Fortune‘s Tristan Bove writes: “He claims that because of this poor labeling, his sense of leverage was 0x when it was actually 1.7x and his sense was that he had 24 times the average amount of daily withdrawals in liquidity when he actually had just 0.8x. In other words, he was more leveraged than he thought and had less cash to cover it than he thought—a lot less. Then, when roughly $5 billion of withdrawals were made on Sunday, he found himself here.”

In gauging CFOs’ sentiment on crypto, finance chiefs at banks are in no hurry to implement it. The U.S. Federal Reserve Board’s senior financial officer survey was distributed to 80 banks. According to findings released in May, two-thirds of respondents said distributed ledger technology and crypto-related products were either not a priority or a low priority in their bank’s growth and development strategy over the next two years.

One thing’s for sure: CFOs who were wary of crypto before, are probably feeling even more cautious now.

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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This story was originally featured on Fortune.com

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