FTX’s Collapse and Basic Rules of Business

Before its steep fall, the cryptocurrency exchange FTX was worth 32 billion USD. After several failed attempts to save what was once one of the most important trading places for cryptocurrencies, FTX had to file for bankruptcy. And when it rains it pours: Soon after, word got out that FTX founder Sam Bankman-Fried had used customers’ money to place risky bets going through a different company.

The First Sign of Crypto Armageddon?

The FTX crash is just another setback for the cryptocurrency market following months of high pressure. Does that mean that there is no future for bitcoin, ethereum, and other crypto assets and their vision of a new, innovative system based on tradeable digital assets? Michael König, Senior Lecturer at WU’s Department of Strategy and Innovation, begs to differ: “The opposite is true: The crash was a big blow to the entire sector, but it could actually help this fascinating industry redefine itself.”

Disruptive Innovations and the Pied Piper Syndrome

Unfortunately, some managers in the sector have confused added value for customers with slot machines that only play into the pockets of casino operators. “That’s the real issue: the Pied Piper syndrome,” König explains, adding that phenomena of this kind regularly pop up in economic history, and particularly often in the context of a boom. “When rates climb and disruptive innovations create new growth markets, catastrophes in the vein of the FTX insolvency are bound to happen.”

In the current state of shock the crash has caused in the industry, the sorry end of FTX can be a teachable moment. “Companies have finally started to grow up.” Posing critical questions is part of this process – yet it’s exactly questions like these stakeholders have failed to ask for fear of being exposed as outsiders or ignoramuses. “Social media and their mechanisms of creating glorified and infallible heroes played an instrumental part in this.”

Lessons for the Future

But how can we avoid disasters like the one that struck FTX in the future? And more specifically, what can customers, investors, and companies do? Strategy expert König has some tips up his sleeve.

• Customers

Financial literacy is a must if you are looking to invest in a field that is both new to you and new to the world. Customers need to scrutinize the product in order to understand it and the opportunities and risks it harbors. In this specific field, it’s essential to have a sound grasp of cryptocurrencies and the blockchain. If you have a hunch that something sounds too good to be true, you’re probably on the right track. “An aside: financial literacy should be taught from primary school,” König adds.

• Investors

König has a stern message for investors, including major institutional players: It’s time for them to do their homework. This includes doing their due diligence, which some investors forego for fear of losing their competitive edge. Governance criteria should also play a more important goal: Is there an independent supervisory board? Is there a working management board with all the usual responsibilities? Is there an internal monitoring system? Is the company well equipped to get through longer dry spells? These are just some of the questions investors have to ponder; and in the crypto field, they are often neglected. The industry also needs to become more diverse: at the moment, it’s dominated by men. This ignores that diversity is a major success factor for companies.

• Companies

Many companies have been wowed by the crypto scene’s strong energy and brashness, which has made them oblivious of the fact that good commercial conduct needs to apply to them as well. “They should look at, for instance, whether their growth story adds up, whether they act in transparent ways, and whether they provide a sustainable benefit compared to their competitors,” König explains. The buzzword of innovation has been overused and should be reexamined: What’s the real benefit for my customers? Do I actually deliver the innovation I keep advertising or is it merely an empty marketing slogan?

Overregulating the Industry vs. Reasonable Control

König has no doubt that the regulations many call for would not result in any improvements. “The fundamental ideas underlying crypto currencies should not be overregulated but softly steered in the right direction.” FTX’s rise and fall was not due to the lack of regulation but because customers, investors, and the company itself failed – and kept turning a blind eye even after critics started voicing their concerns.

“Cryptocurrencies can have a glorious future if basic business management rules are heeded.” And it’s possible that Europe will forge its own path in this respect. “Austrian companies such as Bitpanda and Coinpanion are generally better equipped for these requirements and have also reacted well to the recent crises,” Michael König points out.

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