Preventing Another FTX: Lessons From Lehman

Abstract

The ongoing legal crises surrounding the cryptocurrency firm FTX and its founder, Sam Bankman-Fried, stunned the cryptocurrency industry. Mr. Bankman-Fried, colloquially known as SBF, carried out an estimated eleven-billion-dollar fraud. Many investors will never recover their money. This Note will chart FTX’s rapid ascent and dramatic collapse, explaining the cryptocurrency industry norms and governance practices that led to FTX’s failure. Cryptocurrency was still a nascent industry when FTX catapulted to a thirty-two billion-dollar valuation as the face of the field. Undoubtedly, this crisis stemmed in part from the nature of cryptocurrency: globalized, difficult to track, and susceptible to speculation. But it was also just the latest in a long line of institutional failures caused by corporate mismanagement. Each time, many eagerly backed the darling of a burgeoning space, overlooking risk factors that might have given them more pause for a different company. This Note will compare FTX to Lehman Brothers, another “too big to fail” failure that featured heavily in the 2008 financial crisis and propose solutions to the cryptocurrency-specific and industry-wide problems that plagued FTX. These solutions are applicable to cryptocurrency and its underlying technology, the blockchain, but also include legislation similar to the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted following the 2008 financial crisis. Long-term solutions that will prevent another FTX-like crisis while fostering cryptocurrency innovation and ensuring consumer protection will require a combination of technology, legislation, and regulation.