FTX was one of the world’s largest exchanges for digital money called cryptocurrency. FTX’s problems worsened over the weekend and threatened the entire industry.
Sam Bankman-Fried founded FTX in 2019. He grew the trading firm quickly by attracting the biggest investors in Silicon Valley.
Last week, FTX declared bankruptcy. Bankman-Fried resigned. The firm said some money had disappeared. And experts say hundreds of millions of dollars may have been lost.
The collapse of FTX is a shock to the cryptocurrency industry, which has seen a fair number of problems this year.
Bitcoin, the world’s biggest cryptocurrency, has dropped about 65 percent in value for the year. And Ether, the world’s second most valuable cryptocurrency, lost 20 percent over the last weekend, CoinDesk data showed on Monday.
Why did FTX go bankrupt?
Investors fled FTX last week over fears about whether the firm had enough money. And FTX agreed to sell itself to another crypto exchange Binance. But the deal collapsed while Binance was researching FTX’s finances.
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Last Friday, FTX and several connected companies filed for bankruptcy. The firm had valued itself between $10 billion to $50 billion. It listed more than 130 partner companies around the world, its bankruptcy filing said.
And Bankman-Fried who had rescued several cryptocurrency companies also resigned as chief executive of FTX.
A few days after the failure of the FTX crypto exchange, it is possible to begin a comprehensive and in-depth account of what happened.
FTX was by far one of the leading crypto exchanges in the world. It had grown very quickly, since it was only founded in 2019, and it had two different platforms.
The international version was on FTX.com, while FTX.US was the platform for the US market.
Indeed, it was a US exchange, founded by US citizens in Berkeley, California.
Its key figure was that of co-founder and CEO Sam Bankman-Fried (SBF), who himself had already co-founded in 2017 Alameda Research, also in Berkeley.
However, FTX’s headquarters had then been moved to Nassau, Bahamas, where the headquarters was also established from where to physically direct all operations. The company’s entire operating board, consisting of a dozen other millennials roughly SBF’s age (class of 1992), had moved to Nassau.
The underlying problem with the FTX crypto exchange: what happened?
Although FTX was highly regarded as a crypto exchange because of its technical features, and its operations, it had a very unsound financial foundation.
In fact, unfortunately, the board had decided to use the funds deposited by their clients to finance their company’s expenses and investments. This meant that they no longer had enough reserves in their cash to cover the full total value of the funds that their clients kept in the exchange’s wallets.
Moreover, among the expenses and investments financed in this way were several that were non-interest-bearing, or even loss-generating. For example, the trading and investment subsidiary Alameda Research had obtained a lot of funds from FTX, presumably drawn from customer deposits, and some of these had been lost in unsuccessful market transactions.
It should not be forgotten that during last year’s bull run it was not so difficult to make money from trading, yet in contrast this year it was rather easy to go into a loss.
The final collapse of the FTX crypto exchange: here’s what happened?
A couple of weeks ago news started circulating that there was a hole in Alameda Research’s balance sheet. Later it was also discovered that the company had been using FTT tokens created by FTX as collateral to obtain multi-million dollar loans.
The collapse started precisely from the problems related to the FTT token and its market value.
Until 5 November 2022, its price was about $25, but when Binance co-founder and CEO Changpeng CZ Zhao said they wanted to sell all the FTT they had on their balance sheet, the price started to fall.
At that point, the then-CEO of Alameda Research stepped in and said they were willing to buy them at $22.
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In fact, until 7 November the price did not fall below this threshold.
However, on 8 November, rumors began to circulate about a possible temporary suspension of withdrawals from FTX.
In those days, withdrawal requests on the exchange had increased quite a bit, and we now know that the company did not have enough funds on hand to satisfy them all.
When it was discovered that no more withdrawal requests were being made, the situation imploded. The price of the FTT token on 8 November collapsed to $4, and the following day the company had to officially suspend withdrawals indefinitely.
Although Binance at first offered to take over the company to try to save the exchange, it was later forced to give up because of the huge budget hole that seemed impossible to fill.
At that point, bankruptcy was almost a foregone conclusion, so much so that a few days later the company filed for Chapter 11 under US bankruptcy law, after authorities in the Bahamas had effectively seized everything.
SBF resigned as CEO, and now the company is being run by a celebrated liquidator, John Ray III, well known for his handling of the colossal Enron bankruptcy.
The current situation
The situation at present is complex and in flux.
The exchange is down, and may even be closed forever. Much will depend on the eventual purchase of the assets by perhaps some competitor.
In the Bahamas, the process is underway to liquidate the assets of the FTX group, including those of Alameda Research, run by John Ray III.
In fact, another bankruptcy proceeding would also be underway in the US, such that the company itself hopes to be able to unwind from Bahamian authorities and operate under US regulations.
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It must be said that FTX operated primarily just in the US, and the vast majority of creditors are US-based. There was only the headquarters in the Bahamas, but since there are also valuable assets there, especially real estate, it is unlikely that the Bahamian authorities would choose to let the US authorities do so.
Currently, it appears that the FTX group’s assets located in the Bahamas are under the control of the Bahamian authorities.
This situation greatly complicates the liquidation process, so much so that it seems possible that it will be a long and complicated process.
The impact on the crypto ecosystem
For now, the impact of the FTX implosion on the crypto markets has been violent but not catastrophic.
As far as is known, other than the sharp drop in cryptocurrency prices, only a handful of other crypto companies went under as a result of this event.
Many claim that they expected Bitcoin’s price to drop to $13,000 or even $10,000 following such a major implosion, but it actually stopped at $15,500 and then rebounded to around $16,500.
A recent Kaiko analysis looked at the impact on DeFi, centralized exchanges, crypto market liquidity, and derivatives markets.
After analyzing these aspects, the Kaiko team concluded that once this scandal is behind us, the clear winner will be:
“a healthier foundation on which we can build upon, minus the excess leverage and fraudulent actors.”
Cold wallets and decentralized exchanges should emerge as big winners from this affair, but investors unfortunately tend to have short memories, and repeat the exact same mistakes over and over again over time.
They write:
“Hopefully this fiasco serves as a learning exercise for the entire ecosystem, an over-reliance on centralized entities is just recreating the traditional financial system and offers nothing unique.”
The lesson that should be learned therefore is that decentralization and regulation should be prioritized. They mention, for example, DeFi platforms such as Uniswap and Aave, which continued to function flawlessly even during the two major crypto market crises of 2022.
On the other hand, it has become quite clear that more regulation is needed with regard to centralized entities, not least because large centralized exchanges serve as gateways to crypto markets for the masses, thus being useful and necessary. However, this is precisely why the masses should be protected from crises like this, and only once these correctives are put in place can we really begin to think about creating a truly new financial system.
Was it hacked?
On Saturday, FTX said there had been “unauthorized access” to its accounts, just hours after the bankruptcy filing. A debate started on social media about whether the exchange was hacked or a company member had stolen money.
Exactly how much money involved is unclear. But analytics company Elliptic estimated Saturday that $477 million was missing from the exchange. FTX’s new chief John Ray III said it was stopping any trade or withdrawal and taking steps to secure investors’ money.
Is my bitcoin safe?
Cory Klippsten is the head of financial services company Swan Bitcoin. He said people who own bitcoin should be fine if they keep them off exchanges like FTX. He said they work like a crypto “gambling website.”
“Any exchange is a security risk,” said Klippsten. Some operate better than others, but he said a better choice is to take control of your digital assets. With bitcoin, it is possible to take coins off the exchange, he said.
Is FTX under investigation?
On Sunday, the Royal Bahamas Police Force said it is investigating FTX, adding to the company’s problems. The company had moved its headquarters to the Caribbean country last year.
Even before the bankruptcy filing and missing money, the U.S. Department of Justice and the Securities and Exchange Commission began examining FTX. The agencies were looking into whether any criminal activity or financial crimes were committed, a person familiar with issue told The Associated Press.
What will happen next?
The outcome of FTX’s bankruptcy is uncertain. But its failure will likely result in the destruction of billions of dollars of wealth and create even more doubts about cryptocurrencies.
Sequoia Capital has invested in several successful companies that became Apple, Cisco, Google, Airbnb and YouTube. It described its meeting with Bankman-Fried as “talking to the world’s first trillionaire” and decided to invest in FTX.
After FTX filed bankruptcy, Sequoia has since written down its $213 million in investments to zero. And a pension fund in Ontario, Canada also wrote down its investment to zero.
Bankman-Fried had been the subject of some criticism before FTX collapsed. He largely operated FTX out of U.S. oversight from his headquarters in The Bahamas. But Bankman-Fried spoke about the need for more regulation of the cryptocurrency industry.
Many supporters of crypto oppose government oversight. Now, FTX’s collapse may have helped make the case for closer regulation.
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