FTX collapse hits F1

Twenty years ago Formula 1 witnessed an exodus of giant telecoms sponsors.  Companies which rode the internet wave, then wiped out when investor confidence dissolved in the face of mounting losses and appalling governance.

The Dotcom Bubble had well and truly burst.

Nortel (Williams) and Lucent (Jordan) were two such. The former saw its value crash from ?186bn to ?2bn in two years, the latter collapsed after an ?86m ‘accounting error’ was followed by sales in one quarter being overstated to the tune of ?482m.

Fast forward to today and enter the ‘Crypto King’.  Sam Bankman-Fried, founder and CEO of FTX whose cryptocurrency exchange announced ‘a long term relationship’ with Mercedes in September 2021.

“FTX is thrilled to partner with the reigning Formula One World Champions..,” gushed the then 29-year old, “to continue amplifying our position as the leading global cryptocurrency exchange.”

FTX was just two years old, yet already the third largest crypto exchange.  By January 2022 it was valued at ?24bn.

In April ‘trusted partner’ FTX and Mercedes announced the launch of a series of NFT’s - non-fungible tokens - creating race-inspired artwork which fans could collect, trade and own.

Six months later FTX hit the wall.

It imploded in the wake of a November 2nd article by crypto website Coindesk which questioned the underlying financial strength of sister company Alameda Research.  In essence, Alameda had borrowed vast amounts from FTX, monies which belong to customers.

Binance - sponsors of Alpine - responded by cashing in its holding of FTX’s digital currency, triggering the crypto equivalent of a bank run.  FTX was unable to return customer’s money.

Fearing the wider implications on the industry Binance attempted a rescue, but withdrew after reading FTX’s financials and noting investigations by financial regulators.  On November 11th FTX, Alameda and 100 affiliated companies filed for bankruptcy.

With respect to the ?6.6bn in missing customer money which had been moved to Alameda instead of retained at FTX, Bankman-Fried told the Financial Times this was done ‘accidentally’.

The man tasked with untangling the mess is John Ray III.  At the time of the Dotcom Bubble he had to clear up another corporate disaster, Enron, the oil and commodities business which, through fraud, eviscerated ?9bn of shareholders money

Even he is appalled by FTX.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” adding that management failings included, “the use of software to conceal the misuse of customer funds.”

For their part, Mercedes acted swiftly, suspending the relationship on the eve of the Brazilian Grand Prix, later removing FTX’s branding and website presence.

Toto Wolff, as astute and savvy as they come, admitted to ‘utter disbelief’ at the speed of FTX’s collapse. He is not alone, FTX and its affiliates are said to have left one million creditors out of pocket. The top 50 are owed ?2.5bn.

Sponsorship is a two way street.  Teams benefit from the partner’s financial investment and the halo effect of having a well respected brand or company support your campaign.  In return the sponsors can bathe in the reflected glory of the team, its achievements and the global reach of F1.

As the FTX story unravels other teams - including F1 itself - will be looking askance at cryptocurrency deals.  The entire sector is under the spotlight amid the recognition that ‘sportswashing’ is not confined to countries eager to salve tarnished reputations through sport.  Sponsors do it too.

This article by Mark Gallagher was originally published in GP Racing