The November 2022 collapse of FTX and Binance's 2023 regulatory conflicts highlighted severe governance and accounting deficiencies in the cryptocurrency sector stemming from fundamental regulatory, transparency, and accountability issues. In a cryptocurrency market that lost three-quarters of its value during 2022, the collapse of FTX—the world's third-largest crypto exchange valued at $32 billion with an active trading volume of $10 billion—was particularly devastating after it was revealed that CEO Sam Bankman-Fried and associates misappropriated $8 billion in customer deposits, resulting in Bankman-Fried's 25-year prison sentence and $11 billion repayment order, while Binance and its CEO Changpeng Zhao paid $4.3 billion in penalties for anti-money laundering, unlicensed money transmitting, and sanctions violations.
Warning signs leading to the collapses ranged from lack of regulatory compliance to limited financial transparency and inadequate internal controls, particularly at FTX where CEO John J. Ray III stated he had never in my career seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information. The conflict of interest between FTX and its affiliate Alameda Research enabled illicit use of customer funds, while improper valuation of the exchange's own FTT token suggested false financial stability; meanwhile, accounting challenges for cryptocurrencies—including the absence of a unified accounting framework, debates over proper classification methods (cash, financial instrument, or intangible asset), and issues with accuracy and fair value assessment—contributed to difficulties in detecting errors during the auditing process, further compounded by the fact that auditors often hesitate to accept engagements due to lack of technological expertise and perceived business risks associated with blockchain clients.
Three key lessons emerge from the experiences: from an investor perspective, the volatility of cryptocurrencies and recent collapses indicate that diversification within the cryptocurrency market alone is ineffective; from a regulatory and accounting standpoint, enforceable, transparent financial reporting and disclosure requirements are needed to facilitate investor decision-making and maintain financial integrity; while from the exchanges and practitioners' viewpoint, the Binance and FTX scandals highlight the crucial role of sound corporate governance and independent oversight, which was entirely absent at FTX—with no functioning board of directors, audit committee, or business process reviews—and ultimately allowed customer funds to be diverted to company operations and risky investments.
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A detailed analysis from the Seven Pillars Institute exploring the rise and dramatic collapse of FTX—not merely a financial failure but an ethical crisis in modern finance.:contentReference[oaicite:1]{index=1}
This open-access study published in *The British Accounting Review* (Jan 2025) tackles accounting and auditing weaknesses revealed by the collapses of Binance and FTX, drawing red flags and guidance on risk management, transparency, and governance. :contentReference[oaicite:1]{index=1}
