There is little doubt that Wall Street is filled with some very smart people working for Nasdaq, the New York Stock Exchange and the numerous investment and private equity firms lining the fabled street of lower Manhattan. They advise and prognosticate from an eight-block stretch —or on any number of finance TV shows. And for the most part, Americans tend to listen as they watch their 401k accounts fluctuate with the market. However, the FTX Exchange cryptocurrency scandal is proof that even smart people lack judgment at times—and raises the question of whether the rise in FinTech companies warrants government oversight of some sort.
This question will be the focus of Congressional hearings next week, and one hopes this is an issue where both parties agree on the way forward.
Crypto gained steam during the COVID-19 pandemic, but the market flamed out this year -- and none more so than FTX Exchange and its founder Sam Bankman-Fried. Investors pegged their crypto hopes on the 30-year-old wunderkind which is no surprise as his vaunted FTX Exchange was the second largest crypto in the world. High-profile athletes and celebrities joined the ride; Tampa Bay Quarterback Tom Brady became an FTX ambassador, and his ex-wife supermodel Gisele Bundchen served as an environmental and social initiatives ambassador.
Dazzled by all of this, a parade of high-profile investors from the private equity sector hailed Bankman-Fried’s ultimately doomed venture – perhaps none more than Thoma Bravo Chief Executive Orlando Bravo. His firm, for instance, sank at least $130 million into FTX. And at the time of its investment, Chief Executive Orlando Bravo effusively praised the firm as “the most cutting-edge, sophisticated cryptocurrency exchange in the world.”
This is all good and well. But investors like Thoma Bravo still had an obligation to ignore the razzle-dazzle and protect investors by undertaking due diligence—not a difficult task considering FTX only has around 300 staff and a small board of SBF. Thoma Bravo’s reticence could have something to do with the fact that one of their partners, Robert Sayle, serves on FTX’s advisory board. Sayle was one of a few who didn’t delete the connection to the firm on their Linkedin page as quickly as others on Wall Street.
This was not the first time the Thoma Bravo has exercised questionable judgment. Last year, a lawsuit accused the embattled PE firm was accused of placing profits above cybersecurity.
At issue was a data breach that pushed a malicious software update to thousands of SolarWinds customers, a company owned by Thoma Bravo and another partner. The lawsuit argued that the businesses strategies of both, including lack of security investment led to the data breach. Taken together, the FTX and SolarWinds debacles should give investors cause for concern. In fact, anger and frustration has apparently erupted among Thoma Bravo investors who do not understand how the firm’s once-promising bets have gone so wrong.
There are questions swirling around this debacle, including why the people who are ostensibly supposed to be our watchdogs over firms like FTX, suddenly acting more as its cheerleaders?
Part of the promise (and peril) of FinTech is the lack of government regulation. FTX’s model allowed investors to interact directly in crypto derivatives, which enabled retail traders access to get into the market the same way Scottrade and other sites allowed us to do with traditional assets 25 years ago. This was giving amateurs the same tools as the pros. FTX’s innovative margin model, its supporters argued, actually decreased systemic risk while increasing investor security.
Because FTX controlled customers’ assets, rather than a traditional brokerage, they had cut out the so-called middleman and as a result, when things went south, their assets were frozen by FTX as it collapsed. Technology like this needs regulatory freedom to grow, but it also needs appropriate guard rails to keep from crashing.
The challenge when something like this happens is it doesn’t just hurt those who lost their money, but it hurts the entire asset class. FinTech is a revolutionary suite of technologies that can bring opportunities, wealth, and financial stability to those who otherwise never had it. FinTech and mobile devices have reached millions of “unbanked” in the developing world, giving them one-click tools that were otherwise completely inaccessible.
Crypto is just a part of FinTech, of course, but it’s the one people talk about the most, so when its reputation gets sullied, so does everything else. One hopes that the crypto-market will recover, but for the foreseeable future it will continue to take some hits. Of course, this likely could have been avoided had investors bothered to dig a little deeper. There were certainly warning signs as recently as 2019 when FTX and Bankman-Fried were sued in federal court, accused of manipulating cryptocurrency markets which led to traders losing $150 million.
Lured by what turned out to be an illusory potential for profits, investors blindly rushed in without conducting any of the due diligence they advise their clients to undertake and poured billions into what turned out to be a crypto house of cards. Would some sort of government oversight have prevented this debacle? Generally, I prefer to see the government loosen its regulatory grip on business. But oversight is certainly worth pondering given the astonishing collapse of FTX.