FTX Crash: How Principled Leadership Could Have Avoided the Downfall

The recent implosion of the FTX cryptocurrency exchange, along with the unethical behavior of its CEO, Sam Bankman-Fried, has brought integrity to the forefront and stands as a stark reminder that principled leadership and biblical values are stabilizing and crucial functions in market economies.

FTX, founded in 2019, quickly rose to prominence in the crypto exchange space by making splashy advertising expenditures on stadium naming rights and super bowl ads with people like Larry David and Tom Brady. Exchanges are centralized platforms that allow users to buy, sell, and trade cryptocurrency. Ironically, the ethos of bitcoin and other cryptocurrencies is one of decentralization and removal of rent-seeking intermediaries through decentralized digital ledgers managed through distributed consensus and secured through the proof of work consensus mechanisms (there are other consensus mechanisms, but bitcoin uses proof of work). Since exchanges offer convenient on and off-ramps for cryptocurrency investing, many people use them to purchase these assets. Unfortunately, instead of moving those assets off the exchange to a digital wallet they control, users left the funds in their exchange account like one would with a Fidelity or Charles Schwab account. Bitcoin and other digital assets are meant to be bearer assets like a physical dollar, so self-custody is critical to controlling and demonstrating asset ownership. In short, exchanges were never meant to be a place for people to hold their bitcoin or other digital assets, but for convenience reasons, that is precisely what happened. This confluence of events allowed Sam Bankman-Fried and his colleagues at FTX to re-hypothecate users' funds to invest and earn yield just like a traditional bank would. The problem is that they did not inform users that they would be taking this risk with their funds, and exchanges are not regulated sufficiently for this kind of risk-taking in the first place. In short, Sam Bankman-Fried created a Ponzi scheme of sorts and perpetrated severe and disgraceful fraud.

One of the most egregious examples of Bankman-Fried's unethical behavior was his manipulation of the prices of certain cryptocurrencies on the exchange. According to reports, he and his team used their own funds to artificially inflate the prices of certain coins to attract more traders and increase the exchange's trading volume. This manipulation not only harmed innocent traders who were caught in the crossfire, but it was also market manipulation.

Another issue with Bankman-Fried's leadership was his tendency to use his position of power to bully and intimidate others. He has been accused of using threats and intimidation tactics to silence critics and bury negative news about the exchange. This kind of behavior is unacceptable in any industry and undermines the public's trust and confidence in the crypto market.

These actions ultimately led to the implosion of FTX, as traders and investors began to lose faith in the exchange and pull their funds. The damage to the company's reputation was irreversible, and the company was forced to file for bankruptcy. Additionally, as it tends to do, the increased scrutiny of the books and balance sheet uncovered even more egregious fraudulent activity that had been ongoing even before FTX became insolvent.

The FTX implosion and the unethical behavior of its CEO serve as a stark reminder of the importance of integrity in leadership. A leader's integrity is their most important asset, as it determines how they can inspire trust and confidence in their colleagues and customers.

While the promise of bitcoin and the digital asset industry is incredibly strong, it remains true that technological progress and innovations are merely tools to be wielded for good or ill. SBF and FTX will go down in history as synonymous with Madoff and Ponzi. But out of the chaos, there will emerge other leaders who, by God’s grace and through God-given creativity, will utilize this technology for greater human flourishing and progress.