I took an accounting course once. I was hardly a top student (the class was pass-fail, thank God), but I did retain the basics—including what a balance sheet should look like. And I can tell you that the balance sheet FTX was showing investors in its desperate final days resembled something closer to a surrealist poem than a normal financial document.
Published by the Financial Times, the balance sheet triggered disbelief and amazement in financial circles, especially after Bloomberg's Matt Levine highlighted its many bizarre attributes. These include assets in the form of illiquid shitcoins that FTX had conjured out of thin air, including $2.2 billion of "Serum" tokens and over $600 million of "Maps" tokens, as well as $7.3 million of a mysterious illiquid asset called TRUMPLOSE. And then there is a line for $8 billion of liabilities that is described on the spreadsheet as "Hidden, poorly internally labeled 'fiat@' account." Huh? I can't begin to describe how outlandish this is in terms of standard accounting, so I will leave it to the inimitable Levine:
"If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying 'just what do you think you’re doing Dave?' You cannot apply ordinary arithmetic to numbers in a cell labeled 'HIDDEN POORLY INTERNALLY LABELED ACCOUNT.' The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison."
Levine is not, incidentally, exaggerating when he says prison can be the consequence of this behavior—as I explained earlier, these sort of accounting shenanigans combined with knowing deception translates into federal wire fraud, which can carry a term of 20 years.
Leaving the criminal jeopardy faced by FTX aside, there's the question of how the company produced such a dog's breakfast of a balance sheet in the first place. One reason is that U.S. regulators have long refused to produce any helpful guidance for crypto accounting, which has meant 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 the 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 prominent crypto and blockchain company, was able to conceal its financial misdeeds by using bizarro balance sheets and over 130 overseas subsidiaries.
The good news is that crypto boosters are not wrong when it comes to blockchain offering unparalleled transparency: Every transaction on networks like Bitcoin and Ethereum is public, and anyone can see funds move from wallet to wallet. It is theoretically possible to see what anyone is holding at any time and verify they are solvent. The problem is blockchains are incomprehensible to non-crypto people who prefer Excel spreadsheets. And while there are software tools for reading blockchains, these tools can still be daunting to use.
In the long term, someone will solve these design challenges and it will become possible to use blockchain's superior ledger technology to track all sorts of financial data. Meanwhile, the accounting profession will learn how to integrate crypto-native data such as "proof of reserves" into conventional bookkeeping services. For now, however, everyone is focused on how to clean up the colossal mess left by FTX—whose balance sheet will go down in accounting infamy.
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
