An empire run like a teen with secrets to keep: “Mr. Bankman-Fried often communicated by using applications that were set to auto-delete after a short period of time, and encouraged employees to do the same.”

It’s no fun to pile on to Monday-morning quarterbacking disasters, but then every once in a while, a document comes over the transom that is so delicious, it’s hard to resist piling on.

FTX is a crypto-currency exchange that was founded in 2019 by Sam Bankman-Fried and a couple of young friends. It had been, up until a couple weeks ago, perceived as a pillar of the crypto world, if that means anything. It is now in Chapter 11 bankruptcy proceedings, having lost billions in clients’ money.

The vague story leading up to Thursday was that the company had nowhere near the liquid assets people thought it did, and so, no way to safeguard the billions in deposits that FTX’s customers had placed with the company. It appears a hedge fund inside of FTX was secretly taking funds from those depositors and using them to trade — at least, that’s been the surmise of CNBC and other sources to date.

Thursday came the filing in bankruptcy court of a thirty-page document from the person who has taken over FTX to liquidate it, John J. Ray III, who is a career restructuring expert.

Ray presided over the liquidation of the notorious energy failure Enron, among others. Given the amount of malfeasance Ray has seen in his career, it’s quite something to read what he had to say in his dossier.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” writes Ray of FTX, after a week going through what little there is of the books.

“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

Among the failures Ray describes,

• “the absence of an accurate list of bank accounts” — it wasn’t even clear where the company’s cash resided;
• Employees bought stuff on the company tab: “In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors”;
• An audit firm that sounds nuts: “Prager Metis, a firm with which I am not familiar and whose website indicates that they are the ‘first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland’”;
• An HR procedure that mixed together employee and contractor records, “with unclear records and lines of responsibility”;
• Managing payments worse than a lemonade stand: “employees of the FTX Group submitted payment requests through an on-line ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis”;
• “did not keep appropriate books and records, or security controls, with respect to its digital assets” — custodian with no idea of custody;
• Managed records like it was Snapchat: “One of the most pervasive failures of the FTX.com business in particular is the absence of lasting records of decision-making. Mr. Bankman-Fried often communicated by using applications that were set to auto-delete after a short period of time, and encouraged employees to do the same.”

There are multiple investigations underway of the whole business, including an SEC investigation and a criminal investigation in the Bahamas, where FTX was domiciled and where Bankman-Fried was apparently residing.

If all this is as bad as it seems, then to my mind, it supports what I wrote over the summer, which is that certain foundational promises of crypto have been broken.

Crypto, it turns out, is not decentralized as its mythology would imply; it’s in the hands of massive exchanges such as FTX and other parties that dominate activity including Binance.

And yet, its centralization has not meant protection for investors, in fact, just the opposite. Crypto is like a throwback to the Great Depression, when there was minimal oversight of banking and depositors were abused on a regular basis without recourse.

Crypto is, in a sense, the worst of both worlds: the manipulation of centralizing forces, but with all the disorganization and lack of security of the Wild West.