FTX was founded in 2019 by Sam Bankman-Fried (SBF), MIT graduate and former Jane Street trader. By 2022 it was the world's second-largest crypto exchange, with a US$32 billion valuation and backing from Sequoia, Tiger Global, SoftBank and pension funds. In November 2022 it collapsed in 9 days after the revelation of commingling client funds with Alameda Research (the sister hedge fund). New CEO John Ray III (who also led Enron's recovery) called it a "complete failure of corporate controls". SBF was sentenced to 25 years. The case is a master class on agency theory, corporate governance and why independent boards exist.
Agency theory: the fundamental problem
Michael Jensen and William Meckling published in 1976 "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure" — one of the most-cited papers in financial economics. They formalized what they called the agency problem: in firms where capital owners (principals) delegate control to managers (agents), incentives diverge. Managers want salary, status and on-the-job consumption; owners want returns and risk minimization.
Because information asymmetry prevents principals from perfectly monitoring, managers capture value that should go to owners. Agency costs include: (i) monitoring (audit, boards); (ii) contractual obligations (stock options aligning interests); (iii) residual loss (value lost even with all protections). Modern corporate governance exists entirely to minimize these costs.
At FTX, the agency problem reached grotesque scale: creditors, depositors, investors delegated to SBF control over billions in funds — with no independent board, no rigorous audit, no separation of duties. SBF had a mandate to "do what he thought best", and what he thought best included transferring client money to his hedge fund, financing personal bets and subsidizing extravagant spending on marketing, politics and Bahamas real estate.
Commingling: the heart of the fraud
In any regulated exchange, there is a basic rule: client assets must be segregated. When you deposit BTC at Coinbase, that BTC sits in an accounting-segregated wallet — it is not Coinbase's money. If Coinbase fails, your BTC is yours, not its creditors'. This is called account segregation and has been foundational to custody law since the 19th century.
FTX broke that rule systematically. Client funds deposited at FTX went to accounts controlled by Alameda Research (SBF's other company). Alameda used those funds for directional trading, loans to related parties, venture investments in crypto startups and personal spending by SBF and executives. When the market turned in 2022, Alameda held massive losses and owed ~US$8 billion to FTX — a figure that never existed as a recoverable asset.
Legally, this is called misappropriation. It is not a gray area; it is a crime. SBF and the inner circle (Caroline Ellison, CEO of Alameda; Gary Wang, CTO of FTX; Nishad Singh) knew. The external auditor (Prager Metis, an obscure firm) did not detect it. Investors did not perform adequate due diligence. Regulators (Bahamas) did not monitor. All checks failed simultaneously.
The 4 stages of collapse
Alameda's balance sheet revelation
CoinDesk published on November 2 a report on Alameda's leaked balance sheet: US$14.6B in assets, of which ~40% was FTT (FTX's native token). This revealed that Alameda was collateralized by a token issued by FTX itself — a Ponzi-like structure where one leg stood on the other. Worse: Alameda had US$8B in debt. The market got it: if FTT fell, Alameda would fail; and since Alameda was entangled with FTX, FTX could fail too.
Changpeng Zhao (CZ)'s tweet
CZ, CEO of Binance (FTX's arch-rival), tweeted that Binance would sell its FTT holdings ("decision taken based on recent revelations"). That was the trigger for the run. FTT crashed 80% in 48 hours. FTX depositors began withdrawing en masse. By November 8, withdrawals totaled US$6B — and FTX could not honor them. The company suspended withdrawals. CZ floated an acquisition but withdrew within 24 hours after due diligence.
Bankruptcy filing and John Ray III's appointment
On November 11, FTX filed Chapter 11 in the US. SBF resigned. John Ray III — the bankruptcy specialist who led Enron's recovery — was appointed CEO. His first report, filed in court, was devastating: "Never in my career have I seen such a complete failure of corporate controls". He documented: no reliable bookkeeping, no employee registry, salaries paid over WhatsApp, dozens of companies in the conglomerate with no clarity on who controlled what.
Trial and conviction
SBF was extradited from the Bahamas, tried in New York in October 2023. The defense argued managerial incompetence (not a crime). The prosecution presented direct testimony from Ellison, Wang, Singh — all in plea deals — detailing explicit instructions from SBF to divert client funds. In November 2023, he was convicted on 7 counts (wire fraud, securities fraud, conspiracy etc). In March 2024, sentenced to 25 years. Creditor recovery came in around 100 cents on the dollar (due to crypto's rebound and assets recovered 2022-2024) — a positive outcome compared to initial expectations.
What went so wrong across so many fronts
1. Absence of an independent board
FTX's board was essentially composed of SBF, an in-house lawyer and a friend. No independent directors. No audit committee. No compensation committee. This structure — common in early-stage startups — is inadequate for a company custodying billions in third-party assets. In any traditional financial institution, it would be rejected at the first regulatory step.
2. Investor due diligence failure
Sequoia published (and later deleted) a post praising SBF as the "next crypto Warren Buffett". Tiger Global invested without an adequate board seat. Ontario Teachers (Canadian pension fund) lost US$95 million. The pattern: 2021-cycle FOMO, fear of missing the "next big name", and an aura of SBF's genius (MIT, Jane Street, effective altruism) that silenced skepticism. Adequate due diligence would have caught the red flags: obscure auditor, absent governance, Alameda-FTX entanglement.
3. Regulatory arbitrage
FTX operated primarily from the Bahamas — a jurisdiction with permissive crypto regulation and limited supervision capacity. That allowed the company to avoid custody rules from the SEC, CFTC and FinCEN. Lesson: regulatory arbitrage has limits. When an operation grows to billions and attracts global depositors, the absence of regulation becomes a liability, not an asset. In the post-FTX era, jurisdictions with regulatory reputation (NY, Singapore, EU post-MiCA) gained traction; pure offshore lost.
4. Marketing as false signal
FTX spent hundreds of millions on marketing: FTX Arena naming rights (Miami Heat), Super Bowl commercial with Larry David, Major League Baseball sponsorships, endorsements from Tom Brady, Gisele Bündchen, Steph Curry. This should have raised a flag: why would a supposedly profitable company need to burn so much on branding? In hindsight, it was maskirovka — hiding fragility behind an appearance of solidity. Coinbase, by comparison, spent relatively little on brand marketing. The difference was that Coinbase had a real balance sheet.
Want to take SBF's — or Ellison's — decision?
At SMX, you are an FTX/Alameda executive in September 2022, with Alameda bleeding billions and FTT artificially propped up. Four ethical and strategic decisions under pressure.
Explore SMX →Conclusion: governance is product, not overhead
The permanent lesson of FTX is that corporate governance is not bureaucracy to be avoided — it is the core product of any firm custodying third-party resources. The independent board, separation of duties, external audit, committees — all of this exists not to slow innovation, but to protect stakeholders from the fundamental agency problem Jensen-Meckling described 50 years ago.
Post-FTX accelerated three trends: (i) demand for transparent proof of reserves at exchanges; (ii) migration of institutional capital to regulated custody (Coinbase Institutional, Fidelity Digital Assets, Anchorage); (iii) MiCA framework adoption in the EU, creating the first comprehensive regulatory regime for crypto. FTX died so the industry could learn — an expensive lesson, but potentially a durable one.
Sam Bankman-Fried built a US$32 billion empire in 3 years by exploiting gaps in governance, regulation and due diligence. It cost him 25 years in prison, billions for clients and investors, and a year of contagion across the crypto ecosystem. Perhaps the only benefit was documenting, with forensic rigor, exactly how basic corporate governance protections can fail simultaneously — and why each of them matters. It is mandatory reading for any board of directors.