Market Wrap: Investors Continue to Learn More About FTX's Mismanagement

In an essay for CoinDesk, Francine McKenna, a journalist and lecturer in financial accounting at the University of Pennsylvania’s Wharton School, laid out a series of missteps in FTX's auditing process.

This article originally appeared in Market Wrap, CoinDesk’s daily newsletter diving into what happened in today's crypto markets. Subscribe to get it in your inbox every day.

• Francine McKenna, a journalist and lecturer in financial accounting at the University of Pennsylvania’s Wharton School, wrote in an essay for CoinDesk that the blowup of Sam Bankman-Fried's empire was like a meteor striking the crypto world, but foreseeable “if you knew where to look in the audited financial statements.”
• McKenna explained that the blowup of Bankman-Fried's empire was like a meteor striking the crypto world, but foreseeable “if you knew where to look in the audited financial statements.”
• The first red flag was the existence of two audit firms. “Why hire two different firms rather than one to produce an opinion on consolidated results?” McKenna wrote. “With the benefit of hindsight, we can see it perhaps suggested that Bankman-Fried didn’t want any firm to see the whole picture.”
• She questioned FTX’s selection of two small firms, Armanino and Prager Metis, which have little experience auditing large enterprises, instead of Big Four global companies, such as E&Y and KPMG that have a history of working with such clients.
• A second red flag for readers of FTX’s 2021 audit reports was that neither Prager Metis nor Armanino “provided an opinion on the FTX US or FTX Trading internal controls over accounting and financial reporting. What was discovered by FTX's new CEO, restructuring expert John J. Ray III, should have been obvious much earlier: "There were no controls."
• A third red flag that McKenna highlighted was that neither FTX Trading or FTX US paid federal income taxes, although both appeared to be profitable.
• The biggest red flag “should have been the number of complex, roundtrip and utterly confounding related-party transactions documented in just these two years,". The great number of related-party transactions at FTX Trading made the financial analysis quite difficult.

Other News

Bitcoin remained steady snugly above its most recent $16,000 support, as investors continued to shrug off the latest developments from the FTX collapse. The largest cryptocurrency by market capitalization was recently trading at about $16,600, roughly flat over the past 24 hours. BTC sank less than 2% for the week. How long markets hold tight is unclear, say analysts.

Ether was almost equally unimpressed by the spreading FTX contagio and changing hands just above its recent $1,200 support, up slightly. The second largest crypto in market value rose a few ticks of a percentage point, although ETH was down almost 5% from a week ago.

Sports fan tokens have offered a rare bright spot in the current markets gloom, rising amid soccer World Cup euphoria. The world’s next big sporting event begins Sunday in Qatar. The native token of the Chiliz blockchain (CHZ), which powers the largest sports fan token creator platform Socios.com, has surged 11% in the past 24 hours.

Latest Prices

CoinDesk Market Index (CMI) 842.23 −0.9 ▼ 0.1% Bitcoin (BTC) $16,632 −44.2 ▼ 0.3% Ethereum (ETH) $1,207 +1.9 ▲ 0.2% S&P 500 daily close 3,965.34 +18.8 ▲ 0.5% Gold $1,752 −8.9 ▼ 0.5% Treasury Yield 10 Years 3.82% ▲ 0.0 BTC/ETH prices per CoinDesk Indices; gold is COMEX spot price. Prices as of about 4 p.m. ET

Altcoin Roundup

• Emurgo, the founding entity of the Cardano blockchain, plans to launch USDA – the first fully fiat-backed, regulatory-compliant stablecoin – in early 2023. Alongside the tokenization of USD, Emurgo will soon enable the conversion of other stablecoins, such as USD Coin (USDC) and tether (USDT) to USDA, with long-term plans to enable conversion and swaps of cryptocurrencies such as bitcoin (BTC), ether (ETH) and other cryptocurrencies.
• Sports fan tokens rallied ahead of the FIFA World Cup, defying crypto market gloom. Socios.com’s CHZ jumped 11% in a day, while fan tokens of national soccer teams of Portugal and Argentina are up 50% and 28%, respectively, amid mounting anticipation for the soccer World Cup, which starts Sunday.

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