Cryptocurrency exchange FTX filed for Chapter 11 Bankruptcy protection on November 11, 2022 after a rapid fall from grace. The company’s valuation plunged $32 billion in bankruptcy within days, dropping founder and CEO Sam Bankman-Fried’s $16 billion net worth to near zero.
The collapse of FTX shook the volatile crypto market, which lost billions in value, falling below $1 trillion. The consequences of FTX’s rapid decline and collapse will likely impact cryptocurrencies in the future and may even drive broader markets.
On November 16, a a class action lawsuit has been filed in federal court in Florida, alleging that Sam Bankman-Fried created a fraudulent cryptocurrency scheme designed to take advantage of unsophisticated investors across the country. Other celebrities named in the lawsuit include Steph Curry, Shaquille O’Neal, Shohei Ohtani, Naomi Osaka, Larry David and Kevin O’Leary who allegedly helped Bankman-Fried facilitate the plan.
The US House Financial Services Committee said it would hold a hearing in December 2022 on the FTX collapse.
Below we explore what went wrong with FTX.
Key points to remember
- Cryptocurrency exchange FTX collapsed in early November 2022 following a CoinDesk report highlighting potential leverage and solvency issues involving trading firm Alameda Research.
- FTX faced a liquidity crisis and the search for rescue funds; Rival exchange Binance considered buying parts of the company, but quickly backed down.
- On November 11, FTX’s CEO resigned and the company filed for bankruptcy.
- In the hours that followed, FTX experienced a possible hack in which hundreds of millions of tokens were stolen.
Started by Sam Bankman-Fried when he was just 28 years old, FTX has become one of the biggest crypto exchanges in just three years with a valuation of $32 billion. Bankman-Fried used aggressive marketing, including a Super Bowl ad campaign and buying the naming rights to the home of the Miami Heat basketball team. He has become known for his political lobbying and donations as well as his work supporting the cryptocurrency industry more broadly. As values plunged in early 2022, he facilitated deals totaling around $1 billion to bail out struggling cryptocurrency companies due to falling token prices.
What happened to FTX?
The collapse of FTX unfolded over a 10-day period in November 2022. The catalyst for the crisis was a November 2 scoop from CoinDesk which revealed that Alameda Research, the quantitative trading firm also run by Bankman -Fried, held a position worth $5. billion TTF, the native token from FTX. The report revealed that Alameda’s investment foundation was also in FTT, the token its sister company coined, not a Fiat money or another cryptocurrency. This has raised concerns in the cryptocurrency industry over the undisclosed leverage and solvency of Bankman-Fried companies.
Binance says it will sell FTT tokens
Binance, the largest crypto exchange in the world, announced on November 6 that it sell their entire position in FTT tokens, around 23 million FTT tokens worth around $529 million. Binance CEO Changpeng “CZ” Zhao said the decision to liquidate the exchange’s FTT position was based on risk management, following the Terra Collapse (LUNA) crypto token earlier in 2022.
FTX Liquidity Crisis and Binance Deal
The next day, FTX experienced a liquidity crisis. Bankman-Fried tried to reassure FTX investors about the stability of its assets, but clients demanded withdrawals worth $6 billion in the days immediately following the CoinDesk report. Bankman-Fried sought additional money from venture capitalists before turning to Binance. The value of FTT plummeted 80% in two days.
On November 8, Binance announced that it had entered into a non-binding agreement to buy FTX’s non-US business for an undisclosed amount, with the world’s largest cryptocurrency exchange bailing out its close rival.
Binance cancels deal to bail out FTX
The promise of a bailout was short-lived as Binance backed out of the deal a day later. On Nov. 9, the exchange announced it would cancel the FTX deal after the company’s due diligence raised concerns about mismanagement of client funds, among other issues.
Frozen FTX assets and other implications
On November 10, the Bahamian securities regulator froze the assets of FTX Digital Markets, the Bahamian subsidiary of FTX, following news that Bankman-Fried was seeking up to $8 billion in capital to bail out the exchange. . On the same day, the California Department of Financial Protection and Innovation announced that it had opened an investigation into FTX.
Bankman-Fried apologized the same day for the liquidity crisis and admitted on Twitter that the non-US exchange FTX did not have sufficient funds to meet customer demands. Bankman-Fried said “internal mislabeling” caused FTX to miscalculate leverage and liquidity. In the same thread, he said Alameda would be shutting down.
Bankman-Fried steps down as CEO; FTX files for bankruptcy
Bankman-Fried stepped down Nov. 11 as CEO of FTX, replaced by John J. Ray III, who led energy trading company Enron through bankruptcy proceedings years earlier. FTX filed for Chapter 11 bankruptcy protection the same day, revealing that about 130 other affiliates were also part of the proceedings. Bankruptcy filings indicated that FTX had assets in the range of $10-50 billion and liabilities in the range of $10-50 billion as well.
“Unauthorized Transactions” on FTX
Hours after filing for bankruptcy, FTX said it had been the victim of “unauthorized transactions” and would be moving its digital assets to cold room For safety reasons. Outside analysts said they suspect around $477 million was stolen from FTX in the alleged hack.
Future of FTX and consequences of the collapse
FTX’s future as a cryptocurrency exchange is in serious jeopardy. As of mid-November 2022, withdrawals are disabled and a notice on FTX’s website states that the company “strongly advises[s] against the deposit.”
The broader consequences of the FTX fiasco for the cryptocurrency industry will also take time to unfold. As the biggest meltdown in the short history of cryptocurrencies, FTX could further deter investors, who are already cautious due to stability and security concerns. FTX platform clients may not recover their assets, which could trigger legal action. The US Securities and Exchange Commission and other regulators may see the collapse of FTX as justification for tightening regulatory scrutiny of cryptocurrencies, and Congress may be more inclined to step in and create new laws governing tokens and digital exchanges.
The staggering collapse of the third-largest exchange by volume will send shockwaves through the crypto universe for some time to come. Crypto lender BlockFi suspended customer withdrawals on November 11, 2022, and rumors indicate it may have a risky future. Crypto.com saw withdrawals increase between November 12 and 13. Genesis Global Capital has halted customer withdrawals from its crypto lending unit. And that’s probably just the beginning of the collateral damage.
How did FTX fail?
FTX filed for bankruptcy on November 11 after a wave of client withdrawals earlier in the month. CEO Sam Bankman-Fried admitted that the company did not have enough assets in reserve to meet customer demand.
Has FTX been hacked?
Hours after filing for bankruptcy, FTX was hacked. The exchange noted “unauthorized transactions” that may have stolen nearly $500 million in assets, which were spotted by Elliptic. The hacker continued to empty wallets for several days using what analysts called “chain spoofing”. The hacker would then invest these funds in ether.
What will happen to FTX?
In mid-November 2022, the Bahamian securities regulator froze FTX’s assets and the company strongly advises against client deposits. Other regulatory investigations are also ongoing. And civil lawsuits are pending. In one such class action lawsuit, FTX founder Sam Bankman-Fried is named along with several celebrities who have promoted FTX in the past, including Tom Brady, Larry David, Naomi Osaka, Shaquille O’Neal and Stephen Curry.
In November 2022, the FTX cryptocurrency exchange crashed in about 10 days. Following a report suggesting potential leverage and solvency issues, the exchange faced a liquidity crunch and attempted to negotiate a bailout through rival Binance which quickly failed. FTX had its assets frozen, its CEO resigned and filed for bankruptcy within days. The ongoing implications for the future of FTX and the broader cryptocurrency industry are ongoing and difficult to assess.