Ethical Failures and Governance Lessons from the FTX Collapse: A Case Study in

Corporate Responsibility
Table of Contents
ETHICAL FAILURES AND GOVERNANCE LESSONS FROM THE FTX COLLAPSE: A CASE
STUDY IN CORPORATE RESPONSIBILITY.................................................................................................1
INTRODUCTION..................................................................................................................................................3
ETHICAL ISSUE IDENTIFICATION................................................................................................................4
ETHICAL ISSUES CONCERNING THE CASE OF FTX- FRAUD AND MISREPRESENTATION BALDERDASH...............4
STAKEHOLDER DISREGARD.................................................................................................................................5
STAKEHOLDER ANALYSIS..............................................................................................................................7
APPLICATION OF ETHICAL THEORIES......................................................................................................8
UTILITARIANISM..................................................................................................................................................8
VIRTUE ETHICS....................................................................................................................................................9
LEADERSHIP REFLECTION............................................................................................................................9
PERSONAL VALUES AND LEADERSHIP VISION....................................................................................................9
ETHICAL DILEMMAS..........................................................................................................................................10
CAREER DEVELOPMENT AND SKILL..................................................................................................................10
LEADERSHIP PRACTICES SUGGESTED................................................................................................................10
SUGGESTIONS FOR THE ENHANCEMENT OF ETHICAL STANDARDS............................................11
IMPROVE THE CORPORATE GOVERNANCE.........................................................................................................11
INCREASE TRANSPARENCY AND ACCOUNTABILITY..........................................................................................11
POLICIES ON PROTECTION OF CUSTOMERS AND EMPLOYEES............................................................................12
CONCLUSION.....................................................................................................................................................12
REFERENCES.....................................................................................................................................................14

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 Introduction

FTX is a cryptocurrency exchange that was founded in 2019 by Sam Bankman-Fried

and rapidly gained prominence in the digital asset exchange world. It has provided a wide

range of crypto trading services inclusive of spot trading, derivatives, and leveraged tokens

positioned as one of the leading players. The fact that its valuation had rapidly risen to $32

billion at the beginning of 2022 was attractive enough to draw a substantial investment from

major venture capital firms and investors who believed it would go further in expansion

within the crypto market. Indeed, FTX was touted as a revolutionary force in the world of

cryptocurrency, Bankman-Fried nothing less than a visionary determinedly working toward

innovation and access in the new world of digital finance.

However, that success story of FTX took a complete U-turn in November 2022, when

revelations regarding immense financial mismanagement and fraudulent practices came to

light, followed by an unexpected and rapid collapse that reached its endpoint in the

bankruptcy of the company. In this regard, the sudden collapse of FTX sent shockwaves to

the very core of investors and customers, whether employees or part of the wider

cryptocurrency market. Investigations showed customers' money misappropriation and

consequential illegitimate cover-up of the insolvency position. The case proves what happens

if the corporate world does not stop at unethical practices, with ethics, transparency, and

sound governance structures playing an important role in a no-man's-land where innovation

moves fast and regulations hardly keep pace.

The collapse of FTX is one of those heartrending tales of how organizational

mismanagement and ethical violations may lead to severe disasters. This paper will discuss,

using ethical theories as a framework of analysis, ethical issues in the operation of FTX. It

also seeks to shed light on ethical practices that should inform business decisions, more so in

turbulent and high-stake circumstances typical of the cryptocurrency market.

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 Ethical Issue Identification

The ethical challenges presented by the FTX scandal are a multitude but they revolve

mostly around fraud, deception and total disregard for stakeholder welfare. These deviations

from ethical conduct were not one-off events rather they formed part of a whole process of

decision making that focused on immediate benefits at the expense of future responsibility.

This paragraph goes on to explain these ethical issues in detail, illustrating their impact on

various stakeholders and how they were inflicted by FTX leadership.

Ethical Issues concerning the case of FTX- Fraud and Misrepresentation Balderdash

One of the critical ethical issues regarding FTX involved the issues of d fraud and

misrepresentation about the financial status of the company. After investigations and

subsequent court hearings, it also emerged that Bankman-Fried and other senior management

team members of FTX had engaged in other dishonest practices that sought to lie to investors

and customers concerning the platform's safety and security. As reported by the U.S.

Securities and Exchange Commission (SEC), FTX’s executives had committed fraud and

diverted billions of dollars of their clients’ money for their personal use, risky ventures, and

for their trade business with an associate called Alameda Research (SEC, 2022). Instead of

doing what a fiduciary is obligated to do with customer deposits i.e. safeguard them and only

use them as per the customer’s sole discretion, FTX used such funds for the purposes of

Alameda by surreptitiously transferring customer accounts to these entities.

Trust was grossly violated in the sense that there was an effort to hide the dire state of

FTX’s finances and customers’ money was used for purposes other than which it was

intended for. Because a good number of these investors were institutions, they believed the

statements made by the management of FTX, only for them to later realize that their

investments were fraudulently taken. The inability to accurately depict the financial condition

and stability of FTX for the purpose of attracting more customers and investors appears to be

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an extreme case of ethical violation, since integrity and openness were erased from the

blueprint on how to achieve revenue growth (Investopedia, 2024). This course of action,

however, eroded the confidence that had been bestowed on FTX and illustrated the perils

brought about by the lack of safeguards in the regulation of cryptocurrency businesses.

Stakeholder Disregard

Disregarding the financial losses, the leadership choices in FTX impacted various

stakeholders. Stakeholders included investors, customers, workers, the cryptocurrency

market, and authorities. Each of these groups experienced different challenges and

consequences as a result of the unethical behavior of FTX.

I. Investors: Over its history, FTX caused a great deal of harm to both

institutional and retail investors. Investors were trained to think favorable

things about the firm and its future growth based on the false portrait of

earnings and financial health. When the firm went down, a lot of investors

were wiped out completely which made the whole concept of trustable and

worthwhile investments in such crypto exchanges like FTX questionable

(Reuters, 2024).

II. Customers: The fact that customer funds were used for unauthorized

investments and personal gains by FTX executives violated the fundamental

principle of fiduciary responsibility. Such a development has caused severe

hardship to a large number of consumers, calling upon the regulating

authorities to evaluate the measures that should be put in place to guard the

global populace within the structures of the crypto business (The Verge,

2022).

III. Employees: The downfall of FTX also had a detrimental effect on its

employees, most of whom suffered from job threats and reputational damage.

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 The employees were, for the most part, not aware of the standing of the

leadership’s engagement in any wrongful dealings and consequently bore the

consequences like any other affected parties. With the filing of the bankruptcy

case, came the loss of all the sustained employment for the staff members and

even a few were targeted by the media for a scandal they were not directly

involved in (Financial Times, 2024).

IV. Cryptocurrency Industry: The impact of the FTX scandal was felt even in the

cryptocurrency industry, with minimal confidence from the public as well as

the regulators. The new crisis emphasized the double standards which exist in

the crypto terrain and the dangers of doing business on a platform that is not

controlled or lightly controlled. Because of this, including the USA, the

European Union, and Japan, the regulators began to execute tougher standards

designed to regulate activities of cryptocurrency exchanges in order to guard

against recurrence of scandals of this nature in future (Al Jazeera, 2022).

V. Legislative Agencies: In order to track the developments surrounding FTX’s

Internal Control System to ensure compliance with capitalization

requirements, or even to take measures to suspend it, regulatory bodies across

globe had no option but to react to the crisis. As already discussed, especially

the veil and diversion of the client’s money were the main forces driving for

changes in the regulatory policies. The precedent of FTX has made authorities

who were previously advocating for light-touch regulation. The impetus here

is to avoid further transgressions of ethics on the side of the authorities and to

regain their credibility among the public regarding digital financial services,

hence the drastic changes in the approach to regulation of the sector (SEC,

2022).

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 The FTX debacle demonstrates serious ethical issues and breaches which have a

ripple effect on many parties, showing how relevant ethical practices and policies are to

business operations in environments with high risk of finance. FTX failed to exhibit the core

principles of any healthy civilization, those of openness, responsibility, and concern for all

participants. The story serves as a ringing warning for the crypto ecosystem as it appears to

set up ethical conduct in business practices.

Stakeholder Analysis

The collapse of FTX had profound effects on various stakeholders. The table below

outlines the key stakeholders, the specific impacts they experienced, and the ethical

considerations involved

Table 1: Stakeholders Analysis

Stakeholder Group Specific Impacts Ethical Considerations

Investors - Significant financial losses due to - Violation of transparency
misrepresentation of FTX's and honesty principles.
financial health. - Breach of fiduciary duty to
- Erosion of trust in investment provide accurate information.
decisions.
Customers - Loss of deposited funds. - Breach of fiduciary
- Inability to access or withdraw responsibility to safeguard
assets. client assets.
- Financial instability and personal - Failure to honor
hardship. commitments to customers.
Employees - Sudden job loss and - Lack of transparency within
unemployment.- Damage to the organization.
professional reputation. - Ethical obligation to ensure
- Emotional and financial stress. employee welfare.
Cryptocurrency - Increased regulatory scrutiny. - Responsibility to uphold
Industry - Decline in public trust and industry standards.
confidence. - Impact on the reputation of
- Potential for stricter regulations the broader cryptocurrency
affecting the entire sector. ecosystem.
Regulators and - Pressure to implement stricter - Duty to protect public
Policymakers oversight. interest and maintain market
- Need to address regulatory gaps integrity.
exposed by the collapse. - Ethical imperative to prevent
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 - Challenges in restoring market future misconduct.
stability.
Source: Author’s Research, 2024.

Application of Ethical Theories

The disintegration of FTX can benefit from an ethical examination which is profound

and multifaceted. This is because certain ethical perspectives such as Utilitarianism, Kantian

Ethics, and Virtue Ethics can be applied in the context of FTX and how its activities affected

the stakeholders.

Utilitarianism

The principal objective of utilitarian ethics is to promote the greatest good for the

greatest number of people (Sola, 2023). In this regard, it is worth noting that the FTX

executives’ misuse of funds for personal and corporate benefit did not infringe on a thousand

investors. The impact of the financial losses in this case reached out to a thousand investors,

customers, and employees and the benefits that were achieved by the leaders of FTX were

less than that as reported by Investopedia (2024). From a utilitarian perspective, the actions of

the FTX organization would be condemned since the negative effects of the trust in the

cryptocurrency market lost due to the company’s activities and the financial ruin of some of

the individuals in it surpassed the short-term benefits gained by the few within the

organization. This case illustrates a fundamental issue in utilitarianism: that which is

beneficial in the short-term to one group of people is frequently detrimental to society at

large, and especially where stakeholders are excluded from consideration

Kantian Ethics (Deontology)

Kantian ethics, also known as deontological ethics, relies heavily on the concepts of

duty and moral codes, based on the belief that actions regardless of their results should

conform to ethical standards. Categorical imperatives by Kant underlines that people’s

interactions and treatment should be regarded as ends in themselves and not just means to

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other objectives (Hill, 2020). This is in contrast with how FTX treated its customers and

investors, since the company was overwhelmed by its own vested interests. Financial Times

(2024) notes FTXs fraudulent strategies where investors as well as customers were gotten to

increase the worth of the company without regard to the considerations of of the people in

question. Many reasons by FTX in such circumstances can be criticized from a Kantian

perspective as morally flawed in that the company failed to attend to dutiful concerns for the

representation and consideration of the constituent interests of all stakeholders. Such basic

indifference to the essentials of duty, however, according to the general principles of Kantian

ethics, will injure the morals of the very conduct of the business.

Virtue Ethics

Virtue ethics focuses on the person making the decision as their moral character,

asking whether the position portrays actions that can reasonably be described as honesty,

integrity, justice, etc. Virtue ethics would critique FTX’s leadership for lacking virtues as

required to make ethical decisions (O'Connor, 2013). Based on the available court and

business records, actions performed by Sam Bankman-Fried appear to lack fairness and

truthfulness, which tend to make decisions that promote personal gain over the welfare of the

society and institutions (SEC, 2022). A better leader would act with full disclosure and

concern for the correct stakeholders’ interests, embodying principles that sustain a good

workplace. All these shortcomings and redemption of virtues of the leaders of FTX created a

perfect recipe for amplification of immoral practices within the organization.

Leadership Reflection

Personal Values and Leadership Vision

Core Values and Leadership Insights In contrast to the general feelings about FTX

and its collapse, I have an understanding of ethical leadership and what type of leader I want

to be which is shaped by the events more profoundly. What I find most fascinating is how

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quickly in any organization the moral compass can be lost when profits are the only family

one tries. The picture of Sam Bankman-Fried as a leader makes me realize what is at stake if

you choose to overlook ethics – manipulating internal controls, or even worse, evading even

the most fundamental internalize probably disclosures.

Ethical Dilemmas

I keep imagining the position of future leader I will assume, and I want to take a

different path. There will be difficult moments for me after the presentation wherein due to

financial pressures I may be forced to abandon the values that I hold. Nonetheless, I am

resolved that my edifice of leadership will be based on the tenets of honesty, integrity and

compassion without exceptions. This entails for me, ensuring that the workplace does not

only embrace but practices transparency daily as opposed to mere involving the word.

Career Development And Skill

In an attempt to bolster my ethical backbone, I as well actively look for avenues for

ambivalence . I consider working with ethical decision-making mentors and enrolling in

courses that help improve ethical decision-making capacity . Building the ethical resilience is

like building the muscle it calls for training and active engagement at intervals.

Leadership Practices Suggested

The ethical shortcomings of the scenario at FTX suggest that it would be beneficial to

present measures that are capable of addressing such dilemmas in the future:

1. Creating and Implementing Ethical Principles: One of the ways in which ethical

practices can be incorporated and maintained in an organization is through the

establishment of ethical codes and training of the staff on such practices. Lack of

values and their communication to stakeholders in FTX led to values to becoming

evasive in most if not all areas of the organizations.

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 2. Open Leadership: Periodic and open communication regarding the company's

strategies, finances, and governance decisions

3. Responsibility of Leadership: Executives need to be answerable for their deeds in an

organization. Trevino et al. (2000) write that ethical leaders not only demonstrate

appropriate behavior themselves but also expect the same from others, thus creating a

culture of ethics.

These practices would have created a better leadership structure at FTX, which also

compromises the ethical challenges that eventually brought the company down.

Suggestions for the Enhancement of Ethical Standards

In light of the fall of FTX, the importance of ethical principles among cryptocurrency

business is imperative. The following recommendations can be adopted in order to elevate the

ethical practices and regain the confidence of the stakeholders.

Improve the Corporate Governance

Integrity of operations depends on the effectiveness of the corporate governance.

I. Independent Audits: External audit or review get nevertheless; this is done by

commissioned independent firms at periodic intervals to guarantee objective and early

detection of any malpractices. Luo and Yu (2022) balance low and high perplexity

why reporting practices in the cryptocurrency industry are essential to avoid fraud.

II. Board Oversight: An active and well-informed board of directors that nurtures an

executive team while approving key actions helps in the prevention of executive

abuse. Nwabufo (2024) encourages that accepted corporate governance principles

should be practiced within the cryptocurrency industry to ensure fair regulation

without stifling innovation.

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Increase Transparency and Accountability

Moreover, increased transparency and accountability is in the best interest of all

stakeholders and the confidence that they have in the organization.

I. Clear Reporting Standards: There is a need to instil discipline in the corporate sector

by instituting compulsory transparent backed and standardized reporting of all

financial data for all investors/customers to get a true and fair view of the company.

For instance, Luo and Yu (2022) advocate cohesion in financial reporting of

cryptocurrency based businesses, to avoid anarchy like situations.

II. Public Accountability: Corporate executives must take public responsibility for

important corporate decisions, encouraging an environment that expects leader’s

ethical conduct. A good example is the failure of such accountability seen in the FTX

scandal.

Policies on Protection of Customers and Employees

It is imperative to put in place measures that ensure the safety of the customers and

the employees.

I. Protecting Customers’ Money: Policies that clearly outline the protection of

customers’ money, such as holding the customers’ money in trust accounts which are

segregated from the, operational ones, help in preventing embezzlement. Nwabufo

(2024) examines how there is a need for a strong system of governance in order to

safeguard investors and promote their protection.

II. Ethics Beneath the Surface: In-house courses on ethics that require an understanding

of how to detect and report unethical behavior as well equip everyone to internalize

and live by the codes of the organization. Hosseini and Ferreira (2023) discuss the

notion that ethical leadership contributes to organizational identity, calling attention to

the significance of employee voice in promoting an ethical organization.

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 Conclusion

The fall of FTX is a pattern that emphasizes the importance of ethical leadership and

corporate governance. FTX's dishonest behaviour and total respectlessness of the

stakeholders not only crushed the investors' trust in the company, but also negatively

impacted the customers, workers and the entire crypto world. This particular case indicates

the importance of the effective ethical standardization, transparency and accountability, in

every business activity as the same industries like cryptocurrency are in expansion.

However, the analysis of such management concepts as Utilitarianism, Ethics of Duty

and Ethics of Virtues shows just how unethical FTX board was. So, such situations should

not repeat in the future, companies should pay attention to control agenda, full information

disclosure and stakeholders' interest. If the above-mentioned practices are followed, a

responsible society will be formed that will promote development if economic activity

without prejudice to the interests of the stakeholders. The example of FTX warns that an

ethical code and sound management are indispensable.

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