Sam Bankman-Fried, the founder and now former CEO of failed cryptocurrency exchange FTX, originally planned to testify about his bankrupt empire at a congressional hearing on Tuesday. However, there was a change of plan when Bankman-Fried was arrested in the Bahamas the night before on a series of criminal charges related to FTX’s collapse.
But the US House of Representatives’ Financial Services Committee went ahead with the hearing. And while it would have been interesting to hear from Bankman-Fried, or SBF as he is also known, FTX’s new post-bankruptcy CEO, John Ray III, was still around to testify.
Obviously, it would have been preferable to have SBF there to make his testimony public, and many congressmen have expressed disappointment at the timing of his arrest. But SBF had already made its voice heard on live audio Twitter spaces since the failure of FTX in a series of live interviews with everyone from the New York Times to petty crypto advocates. And each time, SBF provided a lot of hemming and hooting.
With Ray as the sole witness, Congress was able to focus on what the new FTX CEO has uncovered so far, rather than the spectacle and back-and-forth debate that SBF would have offered.
Lies about FTX/Alameda/FTX US
Things started to unravel for FTX last month after a series of reports revealed FTX’s trading arm, Alameda Research, as potentially insolvent. Binance, a competitor exchange, decided to sell its stake in FTX crypto token FTT following the news. Soon after, an avalanche of clients began withdrawing their funds from FTX. During this time, as global exchange FTX.com began to break up, SBF claimed that US exchange FTX US was unaffected as the two operated as separate entities.
SEE ALSO: FTX Founder Sam Bankman-Fried Arrested on Criminal Charges
When FTX filed for bankruptcy on November 11, it was obvious that the two were not at all separate as FTX US was included in the filings. In addition, it was revealed that customer funds deposited at FTX were secretly sent to Alameda for investment purposes.
House Financial Services Committee Chairwoman Rep. Maxine Waters (D-CA) asked Ray directly whether there was independent leadership between these supposedly separate institutions.
“FTX Group’s businesses were not separate; it was really run as one company,” he explained, explaining how funds from both exchanges were stored together.
Later in the hearing, Ray stated more bluntly that there was “no distinction” between FTX and Alameda Research.
“There is no independent board,” Ray addressed the corporate structure of FTX and its affiliates such as Alameda and FTX US. “There was one person who controlled everything.”
Slack expenses and Quickbooks?!
Maybe the most viral moment The hearing came during the questioning of Congresswoman Ann Wagner (R-MO).
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CEO John Ray previously said he had never seen “so complete a failure of corporate controls and such a complete lack of trustworthy financial information as here” in his career. Remember, Ray is the restructuring lawyer brought in to clean up Enron after the company’s infamous collapse in 2001.
Rep. Wagner emphasized that Ray called FTX worse than Enron in saying that and asked him to elaborate.
“The FTX group is unusual,” Ray said. “There are literally no records.”
Ray explained how FTX employees would “communicate bills and expenses on Slack,” the instant messaging and chat program popular with many tech companies.
And then Ray dropped another bombshell.
“They used Quickbooks,” he pointed out. “The billionaire company that uses Quickbooks…”
“Fast Books?!” interjected Rep. Wagner, sounding surprised.
Quickbooks is Intuit’s accounting software primarily aimed at small businesses.
“Quick books,” Ray replied. “Nothing against Quickbooks. It’s a very nice tool. Just not for a multi-billion dollar company.”
As previously explained, SBF was originally scheduled to attend the hearing virtually to make its own testimony. His arrest the night before the hearing changed those plans.
However, Forbes received SBF’s testimony early in the hearing. And Rep. Emanuel Cleaver (D-MO) was very unhappy with what he saw.
“Disrespectful…absolutely offensive,” Rep. Cleaver said. describe opening the testimony before commenting that he cannot read it publicly. “This is the United States Congress.”
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So what was in SBF’s opening statement? How would he introduce himself to the Congress?
“I want to start by officially saying under oath,” writes SBF. “I messed it up.”
As such, SBF’s statement is a defense of its actions without assuming any responsibility for potentially criminal wrongdoing. He even goes so far as to blame CEO Ray, who had nothing to do with FTX until the company filed for bankruptcy.
FTX was a mess
According to CEO Ray, FTX had no accounting and no human resources department. When asked about a compliance department at this failed financial institution, Ray simply replied that there are people with “titles.”
FTX’s difficulties in setting up a bank account for client funds came when it was the turn of Republican Blaine Leutkemeyer of Missouri.
Ray said that “the banking situation should have been a red flag.”
Again, John Ray, CEO of FTX, is the guy who came in after Enron collapsed. At the hearing, however, he claimed that FTX’s documentation was “some of the worst” he had ever seen, called FTX’s “paperless bankruptcy” situation “unprecedented” and said it made tracking and tracing very difficult .
“In a moment, [SBF] both as the issuer of the loan and as the recipient of the loan,” Ray cited as an example, explaining how unclear what this particular loan was used for in the first place.
Kentucky Republican Andy Barr questioned Ray about the audits conducted at FTX. For example, an ESG rating firm has given FTX a higher rating than Exxon-Mobile in its governance assessment. Ray joked that he would ask for a refund for that. As Rep. Barr moved on, Ray gave probably the most succinct summary of the entire FTX meltdown.
“Well, we lost $8 billion, so by definition, I don’t trust a single piece of paper in this organization,” Ray said.
Congress was mostly on the same side
This was a hearing by the US House of Representatives Committee on Financial Services, but also a technical hearing as cryptocurrency was a key issue in the discussion surrounding the failure of a major cryptocurrency exchange.
And as far as technology-related congressional hearings go, this was probably one of the least confrontational I’ve come across in a while. Both Democrats and Republicans stayed on target, focusing on the alleged activities of SBF and FTX as a whole.
There have been crypto defenders trying to advocate for the unfulfilled potential of cryptocurrencies. Minnesota Republican Tom Emmer, for example, tried to blame the US Securities and Exchange Commission (SEC) and “centralization” for what happened to FTX.
However, more progressive members of the House of Representatives fired back in what appears to be growing crypto skepticism among elected officials. Michigan Democrat Rashida Tlaib has called the crypto industry “predatory.”
California Democrat Brad Sherman urged his peers not to “throw Sam Bankman-Fried in the trash and then pass his legislation,” citing the Digital Commodities Consumer Protection Act, a pro-crypto law that was billed as “SBF draft law”.
And some of the pro-crypto voices in the room also seemed to have their confidence shaken:
“My patience with the crypto bulls is running out,” said Massachusetts Democrat Jake Auchincloss.
As Web3 is Going Great creator Molly White pointed this out in her live tweetsRep. Auchincloss has a “very supportive” rating in Coinbase’s Congressional Crypto Sentiment database.
“It’s been 14 years and the American public has heard a lot of promises but also seen a lot of Ponzi schemes,” continued Rep. Auchincloss. “It’s time to quit or shut up.”