In recent days, details about the mismanagement of FTX have emerged during witness hearings in a court case. Former employees have also revealed information about the company, including multimillion-dollar losses suffered by Alameda Research due to crypto scams. This suggests that in addition to economic and financial mismanagement, there was also a lack of security and a high level of naiveté and ignorance.
One former employee, Aditya Baradwaj, published information about a crypto scam that Alameda Research fell victim to. The company’s approach prioritized speed over safety, ignoring good engineering and accounting practices. Security checks were only conducted when necessary, and private keys were stored in plain text files accessible to multiple employees. As a result, FTX experienced frequent security incidents.
One incident involved an Alameda trader falling victim to phishing and accidentally sending over $100 million to scammers. Another incident occurred when Alameda engaged in yield farming on a dubious blockchain, resulting in the loss of $40 million. A third incident involved leaked private keys leading to a theft of $50 million. These incidents likely involved funds held on behalf of the exchange’s clients.
FTX’s founder, SBF, believed that taking these risks and bearing the losses was worth it for the purpose of rapid growth. However, no significant changes were made to their modus operandi even after these incidents occurred. Such risk-taking is beyond what the law allows, and it is not surprising that SBF is now facing accusations of committing crimes.
These incidents highlight the stark contrast between the crypto industry’s security standards and those of the traditional financial system. In traditional finance, there are strict separation rules between corporate-owned funds and client funds, with client funds never being used for company expenses. Additionally, IT security standards are much higher in traditional banks. Security is always prioritized rather than being seen as an inconvenience.
Given the revelations about FTX and Alameda Research’s management, it is likely that Sam Bankman-Fried, the defendant in the case, bears significant responsibility for what occurred and may face conviction. The collapse of such a system was perhaps inevitable.
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