FTX: What Happened?
What is FTX?
Up until just a few weeks ago; FTX was one of the world’s leading centralized cryptocurrency exchanges, one that specialized in “leveraged products and derivatives,” handling billions of dollars in assets on behalf of at its peak over a million users around the world.
FTX was a centralized cryptocurrency exchange; otherwise known as a CEX, that allowed its users to buy a plethora of cryptocurrencies with fiat as well as trade cryptocurrencies for other cryptocurrencies through their platform. Although this was one of the primary functions of the exchange, FTX had also primarily built its empire on risky trade options that were deemed illegal in the United States.
FTX rose to prominence since its inception in 2019 through clever marketing schemes and collaborations with major celebrities, sports teams, and companies; along with the rising popularity of its founder, Sam Bankman-Fried.
FTX had also advocated immensely for further regulation surrounding cryptocurrencies spending tens of millions of dollars to lobby and fund politicians on Capitol Hill, with Bankman-Fried becoming the third largest donor to the Democratic party before his empire collapsed.
What Happened to FTX?
In the beginning weeks of November; the once self-proclaimed “world’s most generous billionaire;” Sam Bankman-Fried, and his FTX crypto exchange empire collapsed. The entire FTX ecosystem collapsed as the company had over $8 billion dollars in liabilities to over 1 million creditors it had no way of paying back.
The collapse initially began as reports surfaced Alameda Research; a trading firm Bankman-Fried founded and funded through profits from FTX, had a concerning abundance of the aforementioned FTT tokens. The primary utility of FTT was to pay transaction fees on the FTX exchange when engaging in transactions, but it began serving more and more as a means of funds for Bankman-Fried and his companies.
Shortly before FTX’s collapse; Bankman-Fried had bought out Binance CEO Chengpeng Zhao’s stake in the company, which he paid partially in FTX’s native token. With such a significant amount of FTT tokens in its reserves, Binance decided to sell its FTT tokens in light of the concerning reports regarding Alameda Research’s FTT holdings.
Following the onslaught of liabilities piling up and recent revelations, immense selling pressure was put on FTX’s native token; FTT, causing the price to plummet nearly 90% in the span of just a few short days. In near unison, FTX users and FTT holders flocked to the platform to offload their holdings and withdraw their savings while they could. But for many, it was already too late.
In the span of just 3 days, over $6 billion in withdrawals were requested as users feared their savings and investments would be wiped out as FTX scrambled to find the non-existent liquidity to process those requests.
Amidst the collapse of FTX, Binance engaged in conversations to acquire the exchange but backed out after a number of large concerns highlighted by Binance CEO; Changpenbg Zhao. Those among them was the fact that FTX was actually under regulatory investigations already along with corporate due diligence finding reports of alleged mishandled user funds.
With all the chaos ensuing, FTX halted withdrawals from its platform and shortly thereafter filed for Chapter 11 bankruptcy leaving millions of users locked out of their savings.
FTX’s now infamous founder; Sam Bankman-Fried, resigned after immense pressure from his role as Chief Executive Officer of FTX with John J. Ray III taking his place.
Ray has dealt with massive business failures in the past, such as Enron following its accounting scandal back in 2001. But in FTX’s bankruptcy filings with the U.S. bankruptcy court, Ray described FTX’s collapse as a result of a “complete failure of corporate control” and an “absence of trustworthy financial information” never seen before at this scale.
“Never in my career have I seen such a completely failure of coporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented.” -John J. Ray III in a filing with the U.S. bankruptcy court on FTX’s past management practices
The collapse of this crypto giant has triggered a series of investigations by the United States Justice Department and the United States Securities and Exchanges Commission to find out whether the allegations of FTX fraudulently and/or neglectfully used its user funds to salvage and empower the aforementioned Alameda Research. Although these investigations have just begun, many of those who have lost their life savings or investments are already pursuing legal avenues to seek justice against the company they feel stole from them.
How has FTX’s Collapse Affected The Crypto Space?
Unfortunately, the collapse of this exchange has had a disastrous ripple effect throughout the entire crypto industry. Just a few months back in May, FTX had been praised as heroes when they provided financial bailouts for a multitude of companies on the brink of collapse as the entire market faced further losses after a $2 trillion crash.
The companies that were acquired at the peak of the market crash collapsed in a ripple effect caused by FTX’s downfall. Companies like Genesis and BlockFi have already announced they are ceasing operations following FTX’s dreaded path.
Furthermore, the crypto market as a whole has suffered immensely this month as Bitcoin’s price has fallen approximately 19% and Ethereum falling as well down approximately 24%, wiping out billions in just a few weeks.
The once prominent exchange and its founder have sent shockwaves through the entire industry, becoming just another one of the dominoes to fall in this extremely brutal winter of despair; and one can only hope it does not cause any more damage to an already wounded industry.