The FTX catastrophe (with Byrne Hobart, Vipul Naik, Maomao Hu, Marcus Abramovich, and Ozzie Gooen)

1. Segregate Customer Funds Strictly

Maintain a strict separation between customer assets and company money to prevent operational collapse or opportunities for fraud, ensuring transparency and accountability.

2. Assess Catastrophic Downside Risks

When making high-stakes decisions, thoroughly consider and model the catastrophic negative utility of ‘going to zero’ or total destruction, rather than solely focusing on potential upsides.

3. Don’t Collateralize with Own Equity

Avoid complicated financial arrangements where your company’s economic stability or trading activities depend on using your own company’s stock or token as collateral, as this creates highly correlated and fragile risk.

4. Understand Rules Before Breaking

When encountering seemingly ‘stupid’ or annoying industry rules, first investigate their historical reasons and purpose before attempting to circumvent them, as they often exist to prevent major problems.

5. Strengthen Corporate Controls

Implement robust corporate controls, hire sufficient accountants, conduct regular audits, and establish clear processes to prevent colossal operational sloppiness, especially in complicated businesses.

6. Distrust Centralized, Opaque Systems

Be highly skeptical of complicated systems controlled by a single, opaque entity that asks for blind trust, as it can be very difficult to detect fraud or mismanagement.

7. Separate Financial Business Functions

Avoid consolidating multiple distinct financial functions (e.g., exchange, clearinghouse, prime broker, market maker) into a single entity, as this creates conflicts of interest and correlated risks.

8. Never Risk Others’ Assets

Refrain from making large gambles or taking extreme risks with other people’s money or assets, as this constitutes fraud and can cause immense harm to many individuals.

9. Challenge Linear Altruistic Utility

Critically evaluate the assumption that altruistic impact scales linearly with money, as diminishing returns typically apply even to charitable giving, meaning each additional dollar may do less good than the previous.

10. Anticipate Panic and Cover-Ups

When assessing the risks of large bets, proactively model the likelihood that you or others will panic and engage in immoral cover-up behaviors when facing catastrophic losses, escalating the damage.

11. Conduct Incident Post-Mortems

Systematically conduct post-mortems for all incidents, even minor ones or those not directly your fault, to identify areas for improvement and prevent future, potentially larger, failures.

12. Evaluate Advice Critically

Avoid blindly accepting or rejecting advice from prominent figures based solely on their reputation; instead, evaluate ideas from first principles, considering potential conflicts of interest.

13. Monitor Key Personnel Exits

View the departure of key players from a company, especially in volatile industries, as a potential negative signal for the market or the company’s stability, prompting a re-evaluation of your involvement.

14. Respond to Early Red Flags

Take early warning signs, such as leaked financial documents or internal commotion, seriously and consider taking low-cost protective actions like removing assets, even if the probability of disaster seems low.

15. Vet Organizational Funders

Organizations, especially those heavily reliant on a single source or receiving large, influential funding, must establish clear responsibilities and methods for conducting due diligence and ongoing monitoring of their funders.

16. Uphold High Ethical Standards

Communities and organizations, particularly those with a mission to do good, should strive to maintain an exemplary standard of ethics, exceeding average levels in their respective fields.

17. Scrutinize Funder Intentions

If a new funder seems sketchy or seeks significant power/influence (e.g., board seats), conduct serious investigation before accepting their support, as this can compromise your organization’s autonomy and integrity.

18. Diversify Funding Sources

Avoid over-reliance on a single funding source; understand the reliability of each source and diversify to mitigate risks associated with sudden funding changes or losses.

19. Take Personal Career Risks

While avoiding risks with others’ money, consider taking calculated career risks with your own time and effort, as this can be a sound strategy for personal growth and impact.