Did Crypto Cause the FTX Collapse?

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- [Rick Antle](https://insights.som.yale.edu/researchers/rick-antle "More articles written by Rick Antle")

William S. Beinecke Professor of Accounting


December 02, 2022


**Did something specific about the world of crypto cause FTX's collapse? Or was it just a garden-variety scam?**

To be sure, the nature of the assets in the “crypto world” played a big role in this fiasco. Crypto assets are pure information assets. They have no tangible existence and can therefore be easily moved, stored, sold, etc., at least from a physical point of view. Crypto assets signify rights that exist only to the extent that people believe they do. For example, Bitcoin is valuable because it gives you the ability to acquire goods and services in exchange for Bitcoin. The ability to do this is dependent on whether people choose to accept Bitcoin as payment. An NFT is valuable because it represents an ownership right that you can transfer to someone else, or simply get direct satisfaction from the knowledge that you own a piece of digital property.

This is all very abstract. That makes it difficult to sort different types of crypto assets into clear categories, a first step in regulating them in efficient and effective ways. For example, is Bitcoin a currency, like the U.S. dollar or the Euro, or a security, like a share of Goldman Sachs? The answer guides the assessment of the appropriate type of regulation and selection of the appropriate regulatory body to give jurisdiction.

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It is not surprising, then, that regulators have been a bit behind the curve in the crypto world. (Are they ever ahead? Can you regulate something before there is some experience with it?)

The intangible nature of crypto assets means also that volume can be cranked up very, very quickly. There are no beer barrels to store, no cars to manufacture and ship. You just move around some symbols. This is where the “garden-variety scam” comes in. Business history is full of examples of companies that grew too fast with little attention to controls and accounting, which tend to slow things down. As attorney John Ray—now FTX’s CEO—wrote in a [bankruptcy filing](https://pacer-documents.s3.amazonaws.com/33/188450/042020648197.pdf), having control rest in the hands of “a very small group of inexperienced, unsophisticated and potentially compromised individuals” who in turn are enabled by “compromised systems integrity and faulty regulatory oversight” is a tried-and-true recipe for disaster. Even so, this situation seems quite extreme. Mr. Ray, who is extremely experienced in bankruptcies, states: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

**Are accounting tools able to keep up with 

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