The Bankruptcy of FTX
Things at FTX, one of the largest cryptocurrency exchanges, seemed to be going smoothly until news broke out that the company’s balance sheet was not in good health. Furthermore, reports of the FTX mishandling customer funds caused people to lose confidence in the company. Overwhelmed by negative sentiment and a bank run, the exchange quickly collapsed along with the reputation of cryptocurrencies and exchanges.
What Exactly Was FTX?
FTX was a cryptocurrency exchange based in the Bahamas. The company began within Alameda Research, a trading firm founded by Sam Bankman-Fried and Gary Wang in May 2019. At its peak in 2021, FTX was the third-largest cryptocurrency exchange by volume and had over a million users. Acting as both an exchange and crypto bank, FTX offered high interest rates of up to 8% to depositors.
The Beginning of the End
Things began to unravel on November 6, when Binance CEO Changpeng Zhao announced that his firm intended on selling $580 million worth of FTT coins, a cryptocurrency made by FTX, due to “recent revelations that have come to light”. These revelations include the fact that FTX was operating closely with Alameda Research in a way that regulations would prohibit. Basically, Alameda Research was using the customer funds of FTX to profit from their investments. This news sparked a bank runoff as people began to withdraw their crypto in fear as Bloomberg reported that the selloff would likely send FTT plummeting. Finally, on November 11, FTX, the second-largest cryptocurrency exchange, filed for chapter 11 bankruptcy along with its 134 sister companies.
A chapter 11 bankruptcy gives businesses power to reorganize and to pay creditors over time. FTX went bankrupt after failing to liquidate enough assets to meet the demand for withdrawals. Rival cryptocurrency exchange Binance originally had plans to acquire FTX but did not do so after due diligence revealed issues with the handling of customer funds. This, along with ongoing investigations by various government agencies, prevented other rescue buyouts from occurring.
CEO Sam Bankman-Fried stepped down and John J. Ray III, an attorney who has managed many corporate failures, will oversee the liquidation of the company’s assets. Ray III, with his 40 years of experience, said, “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”. FTX estimates it has between $10 and $50 billion in liabilities and assets and several employees are expected to remain working to figure out logistical issues. With the balance sheets and transactions of FTX exposed, Sam Bankman-Fried could be facing serious legal battles as it is revealed that FTX has been lending customer deposits to sister company Alameda Research to fund risky investments. This contradicts FTX’s own terms of services which explicitly states that deposits shall not be loaned to FTX trading. All of this news has sparked widespread criticism about Bankman-Fried with many expressing their anger on social media.
The Impact of FTX’s Collapse
As the largest collapse of a cryptocurrency bank has occurred, there are still many legal questions that remain unanswered. This is because the banking system for cryptocurrencies is so new that the courts do not have a playbook on how to deal with these complicated legal issues. FTX approximates that there are around a million creditors whose investments’ fates remain unclear.
The collapse of FTX has inflicted fear on many people resulting in large amounts of withdrawals in other exchanges. Many people lost a significant amount of money after the exchange collapsed. Adding to the chaos, on November 12, FTX was hacked with $473 million in assets stolen from the exchange. This has sent the cryptocurrency market plunging, with Bitcoin (BTC) plunging by over $1000 on Friday once FTX declared bankruptcy. FTX’s own token, FTT, fell 92% after the news of bankruptcy broke out.
Some celebrities who advocated for FTX are now getting sued as a result of the company’s collapse. For example, both Stephen Curry and Tom Brady have been named in class action lawsuits that accuse them of misleading consumers to invest in the company. Brady along with his wife participated in an FTX advertisement in 2021 which is one example of the celebrity’s involvement with FTX. However, not only are the people associated with FTX feeling the pain, but the reputation of cryptocurrencies has been tarnished as a result of one man’s greed.