Why the media frenzy has diverted attention from the real solution to financial fraud
By: David Xiong
Imagine that you’re the owner of a small plot of land. Winter has arrived, and you need a safe place to store your seeds. Seeing your dilemma, the farmer next door who owns two plots of land, vows to safely protect your seeds in his shed, and better yet, he promises you more seeds next season in return. However, when the next growing season comes around, he doesn’t have enough seeds for his second plot of land so he steals the seeds that he had promised to store for you. Outrageous, right? This type of theft has real implications in today’s fast-paced world of global finance. The recent FTX cryptocurrency collapse highlights this. FTX is a cryptocurrency (a type of digital currency) trading firm led by businessman Sam Bankman Fried (SBF). Recently, investigators found that it commingled investors’ money to help its sister company Alameda Research fund risky bets for financial gain. Nonetheless, this increased focus by the media on accountability business executives like SBF actually distracts from the real problem of Wall Street’s financial practices. Instead, our government must have rigorous discussion of how we should monitor and regulate the financial activities of private companies, such as FTX, in order to prevent similar misuse of investors’ money.
Despite the initial belief that FTX’s financial business practices were transparent, legitimate, and successful, the trading activities of stealing investor’s money for a sister company were allegedly fraudulent. CoinDesk first raised suspicion regarding FTX’s illegal financial practices on November 2, 2022 via a leaked balance sheet from its sister company Alameda. The balance sheet revealed that under the watch of Alameda CEO, Carolline Ellison, Alameda had strangely amassed a huge sum of FTTs–FTX’s crypto token. On November 6, one of FTX’s rival companies, Binance, sold all of its FTT tokens, triggering FTX’s liquidity crisis. The next day, FTX asked Binance to bail them out by buying the company. Ultimately, Binance decided to pull out of the deal when news reports of SBF’s wrongdoings at FTX began to emerge. Due to the collapse of FTX’s FTTs, FTX filed for bankruptcy, SBF stepped down, and FTX’s illegal plot to secretly transfer stolen investor money to Alameda to help fund risky bets was exposed.
Of course, the media has brought some accountability to those who played with the system on Wall Street, but they have distracted attention from the real issue of regulatory loopholes. By intensely focusing on SBF’s trial, we give SBF a platform to speak his lies.
As the saying goes, any attention is good attention.
In order to counter FTX’s malicious practices, we must require similar companies to submit quarterly reports. Since FTX and Alameda are private companies, they do not have to produce quarterly reports as public companies are mandated by law. If FTX and Alameda were even required to produce transparent annual company reports in the same way that public companies must, their financial inconsistencies likely would have been exposed far earlier, as savvy investors would have realized that the math just didn’t ‘add up’. Instead, the fate of regulation was left solely to the CFTC, which has been found by numerous financial experts to be biased towards the sometimes predatory practices of the crypto industry. To date, Wall Street has been seemingly resistant to change its business practices in this regard. However, the time has now come for private companies to provide full public disclosure when it comes to their financial reports, whether they like it or not. If not, the public must step up and pressure Wall Street in order to accomplish the objective of increased regulation for all private companies.
At the end of the day, if full transparency takes place, both investors and corporate finance will win, as future successful businesses will be built upon trust and not illegitimate and fraudulent business practices. Indeed, if no action is taken, many of these big tech corporations will not only go against the law for higher profits, but also turn into a free-for-all farmhouse where a couple of farmers would own all the seeds for our food. And, similar to our farming situation, many investors would starve of money.
Sam Bankman Fried testifies during the House Financial Services Committee.
