The Sam Bankman-Fried Trial Is Revealing Crypto’s Amateur-Hour Ways

A number of major crypto companies did not look at audited financial statements prior to investing or loaning FTX and Alameda Research billions of dollars. This won’t help the industry’s case in Washington or on Wall Street.

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The narrative

Paradigm, BlockFi, Genesis and other companies did not have access to audited financial statements prior to investing or loaning billions to FTX, FTX.US. and Alameda Research, according to testimonies given in the trial of Sam Bankman-Fried. Rather, these investors and lenders looked at unaudited financial statements and spoke with the executives at these companies to determine critical pieces of information like FTX’s cash flow, its liabilities, its current assets and net asset value.

Why it matters

Everyone, including regulators, is paying renewed attention to the FTX and Alameda Research collapse. The amateur-hour practices coming out in that courtroom are unlikely to impress anyone in traditional finance or in policy, underscoring the distance crypto still has to cover to be taken seriously by the TradFi world.

Breaking it down

Last week, BlockFi CEO Zac Prince testified that most cryptocurrency companies had trouble getting audits, so his team mostly looked at unaudited financials or “effectively any and all financial information that the potential borrower was willing to share with us.”

His testimony came days after former Alameda Research CEO Caroline Ellison testified that she had doctored internal balance sheets that she then sent to companies including Genesis (a subsidiary of Digital Currency Group, CoinDesk’s parent), which, like BlockFi, had also loaned funds to Alameda.

While the crypto industry’s struggles with auditing aren’t new, relying on unaudited financials prepared by stressed out twenty-somethings who unbeknownst to you were trying to hide a multibillion dollar hole on their balance sheets is just an insane way to handle billions of dollars.

For an industry that loves to express the motto “don’t trust, verify,” it is entirely unsurprising that the opposite of that motto sank so many companies – including BlockFi and Genesis, which filed for bankruptcy protection…