The Risks of Cryptocurrencies and the Lesson From FTX Collapse

It is no secret that the cryptocurrency market is a risky environment, and the collapse of FTX served as a valuable lesson. New investors who witnessed the significant rise of cryptocurrencies in 2021 were unaware of what bear markets looked like. Now, they have experienced the risks firsthand and gained a better understanding. The collapse of FTX exchange was a lesson for cryptocurrency investors.

Why Are Cryptocurrencies Risky?

Firstly, due to the lack of established legal frameworks, bad actors in this field can easily operate without consequences. SBF was one of them, and it was revealed that they used customer assets for their own benefit after painting a different image with FTX. Many experts had started to trust FTX based on its good relationship with regulators before its bankruptcy.

When you send Bitcoin or Ether to a cryptocurrency exchange, the money appears in your account. However, the figure shown on the website or application could be just a number. SBF did exactly that. The balances displayed on the user interface did not actually have an on-chain counterpart. Most of the time, they were buying and selling cryptocurrencies that did not exist.

Subsequently, exchanges introduced on-chain verification systems to regain investor trust. However, without the legal ground for regular audits, there is no such thing as 100% security. Investors have no choice but to trust crypto companies that claim to be trustworthy. It remains complex, especially for new investors.

FTX Auditor Faces Lawsuit

The founder of FTX, who was summoned to testify in committee meetings in the House of Representatives and took pictures with senators to share on social media, is now facing a lawsuit from the auditor. Time is ticking, and things are rapidly changing in the crypto world.

The U.S. Securities and Exchange Commission (SEC) has initiated legal action against an accounting firm that provided services to FTX. According to the announcement made by the SEC on September 29, it is alleged that Prager Metis provided audit services to FTX without ensuring the necessary independence and continued to provide accounting services, which is a banned practice in the industry.

“As alleged in our complaint, for approximately three years, Prager’s audits, reviews, and examinations fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is critical to protecting investors,”

Although FTX is not explicitly mentioned in the report, it highlights “hundreds” of violations of auditor independence. On January 25, the current CEO of FTX, John Ray, expressed concerns about the reliability of audited financial statements.

Source