I took an accounting course once. I was far from a good student (the class was pass-fail, thank goodness), but I got the basics down, including what a balance sheet should look like. And I can tell you that the balance sheet that FTX was showing investors in its desperate last days sounded more like a surreal poem than a normal financial document.
Posted by the FinancialTimes, the toll has sparked disbelief and astonishment in financial circles, especially after Bloomberg’s Matt Levine pointed out its many bizarre attributes. These include assets in the form of illiquid shitcoins that FTX had created out of thin air, including $2.2 billion in “Serum” tokens and over $600 million in “Maps” tokens, as well as 7 $.3 million of a mysterious illiquid asset called TRUMPLOSE. And then there’s a row for $8 billion in debt that’s described on the spreadsheet as “hidden and mislabeled ‘fiat @’ account internally.” Eh? I can’t begin to describe how weird this is in terms of standard accounting, so I’ll leave it to the inimitable Levine:
“If you try to calculate the equity of a balance sheet with an entry for HIDDEN ACCOUNT MISLABELED INTERNALLY, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in its little paperclip hand, in saying ‘just what do you think you’re doing Dave?’ You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN ACCOUNT MISLABELED INTERNALLY”. The result of adding or subtracting these numbers with ordinary numbers is not a number; it’s jail.
By the way, Levine isn’t exaggerating when he says that jail time can be the consequence of this behavior – as I explained earlier, this kind of accounting shenanigans combined with conscious deception results in wire fraud federal, which can carry a 20-year sentence.
Leaving aside the criminal danger that FTX faces, there is the question of how the company produced such a dog breakfast of a track record in the first place. One reason is that US regulators have long refused to produce useful guidance for crypto accounting, meaning professional bean counters have failed to come up with a system for integrating crypto assets into financial statements. . As venture capitalist Nic Carter recently told Fortune Crypto, “accounting firms are not yet equipped to handle auditing.”
This is ironic because, since the early days of Bitcoin, crypto evangelists have hailed blockchain technology for its reliability and transparency. Yet FTX, a major crypto and blockchain company, was able to cover up its financial misdeeds using bizarro balance sheets and over 130 overseas subsidiaries.
The good news is that crypto boosters don’t get it wrong when it comes to blockchain offering unparalleled transparency: every transaction on networks like Bitcoin and Ethereum is public, and anyone can see the funds move from one wallet to another. It is theoretically possible to see what anyone is holding at any time and verify that it is solvent. The problem is that blockchains are incomprehensible to non-cryptos who prefer Excel spreadsheets. And while there are software tools for reading blockchains, these tools can still be intimidating to use.
In the long run, someone will solve these design challenges and it will become possible to use blockchain’s superior ledger technology to track all kinds of financial data. During this time, the accounting profession will learn to integrate crypto-native data such as “proof of reserves” into conventional accounting services. For now, however, everyone is focused on cleaning up the colossal mess left by FTX, whose balance sheet will descend into accounting infamy.
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
DECENTRALIZED NEWS
FTX’s sister company, Alameda, regularly acquired tokens that he knew would be listed on the exchange, effectively outpacing his own clients. (WSJ)
In an interview, the founder of FTX SBF presented his company’s implosion as the result of mismanaged growth, but acknowledged no moral wrongdoing on his part. (NYT)
The venture capital firm Sequoia quietly pulled a 14,000-word propaganda piece about Sam Bankman-Fried that he commissioned to boost his investment in FTX. (Bloomberg)
Michael Lewisbest-selling author of titles like Flash Boys and silver ball, has spent the past six months with SBF and is working on a new book. (CoinDesk)
The implosion of FTX dealt a blow to charities and nonprofits that expected to receive large donations from the company, but will no longer do so. (Fortune)
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