The recent collapse of the cryptocurrency exchange FTX and the associated legal troubles of founder Sam Bankman-Fried have made me consider again the issue of risk. In particular, I’ve been thinking about risks that are “hiding in plain sight,” meaning they could have been seen without a degree in finance or an ability to perform forensic accounting.
The story of FTX is one in which a founder’s power went unchecked; notably, FTX resisted creating an official board of directors until January 2022, and top executives in the company included several of the founder’s college friends. Additionally, it was headquartered in the Bahamas, reportedly due to the lighter regulatory approach there. These were obvious red flags, but they were largely ignored by investors until FTX fell apart due to lack of sufficient funds for customer redemptions in November 2022.