How Not to Run a Cryptocurrency Exchange

At Japan’s Liquid exchange, recently acquired by FTX, warnings were ignored, breaches unreported and employees berated and cursed at, insiders say.

The Takeaway:

  • From the outside, Japanese exchange Liquid looks like a crypto success story. Trading powerhouse FTX recently acquired it for an undisclosed price estimated to be somewhere between $140 million and $200 million.
  • But former Liquid employees describe a chaotic workplace (even by crypto standards) with questionable security and compliance.
  • For example, sources say that executives downplayed some information security breaches, did not disclose others, failed to adequately address low-level insider theft and prematurely stopped investigations into last year’s $90 million hack.
  • Liquid bought its own QASH token to maintain the price through part of the 2018 bear market and double-counted trades when reporting its volumes, former employees said.
  • Senior management offered IOUs for Telegram’s never-issued GRAM tokens and, according to sources, ignored internal compliance team concerns. Liquid lost millions on the offering.

The December 2018 company Christmas party was awkward, to say the least, for employees of the Japanese cryptocurrency exchange known as Liquid.

Mike Kayamori, co-founder and CEO, wore a Santa Claus suit to the party, held at Liquid’s office, about five minutes from Tokyo Station. About 50 employees were at the party, some of them with their children. A Black employee dressed up as a reindeer.

Kayamori asked the employee, whose wife was in attendance, to get on his hands and knees. The CEO then mounted him like a horse.

People stood with their drinks and watched. Holiday music played in the background.

“He obviously didn’t look happy. He was trying to do his best,” an eyewitness said of the employee.

Shortly afterward, Kayamori apologized to colleagues.

“I wanted a reindeer to cheer up the crowd with me,” he wrote in a message posted on the company’s Slack on Dec. 20, 2018, reviewed by CoinDesk. “I had not even realized what a terrible thing I [had] done until this was brought up to me later.” Kayamori added that he had apologized directly to the employee (who soon left the company).

The incident speaks to management problems that long bubbled under the surface at Liquid.“Of all the things Mike did, I don’t think that was the worst thing,” the eyewitness said. “This was minor.”

“I preach diversity and unity,” Kayamori continued. “I will always remember today as the humbling day I let everyone down and that I need to grow as a human being.”

Mike Kayamori apologizes for mounting employee

A chaotic workplace

From the outside, Liquid looks like a crypto success story, albeit with some bumps along the road. It was one of the first exchanges to be licensed in Japan, which boasts some of the world’s toughest regulations for crypto.

Like many exchanges, Liquid weathered hacks, including a $90 million theft last August that forced it to get an emergency loan from crypto derivatives exchange powerhouse FTX. Led by billionaire Sam Bankman-Fried, FTX later agreed to buy Liquid, legally known as Quoine (pronounced “coin”), for an undisclosed price in a deal that closed on April 4 of this year.