About The FTX Fraud
The FTX fraud entailed using client funds for high risk side investments and operating expenses amongst other fraudulent behaviours. FTX was one of the largest crypto exchanges in the world. When crypto prices started falling significantly in 2022, the market unleashed the true story of the FTX fraud, which was hidden for many years and which showed how some of the largest investors and creditors did not study the FTX risk. The FTX Bankruptcy brought to light the poor risk due diligence process employed by investors and creditors, which meant that they had to take a total loss on the FTX fraud.
Some of the world’s leading investors, including Sequoia Capital, Ontario Teachers’ Pension Plan, and Temasek, invested money in FTX and were unable to adopt appropriate fraud risk management, which is part of the management of risk, and which could have saved them from the FTX fraud and related bankruptcy. It is therefore important for investors and creditors to accurately measure and hedge Fraud Risk.
Lessons from the FTX Fraud
- Operational Risk, which includes Fraud Risk, is the main driver behind Investment Risk and Credit Risk;
- Risk Due Diligence including Insurance Due Diligence should be performed by investors and creditors;
- Insurance for Venture Capital firms impacts IRR by 200-400bps on average;
- The FTX Commercial Insurance should have been reworded and triggered for the benefit of FTX and its investors and creditors.
Insurance Risk for FTX
While the FTX fraud could have been avoided or partially insured, the commercial insurance bought by FTX was likely not reworded and triggered by experts independent of insurance brokers, companies, or lobbyists, resulting in no real hedge for the FTX risk from commercial insurance for the benefit of investors and creditors. The following lists some of the key commercial insurance products that could have been used to the advantage of investors and creditors: