On Nov. 11, 2022, one of the world’s largest cryptocurrency exchanges, FTX, filed for bankruptcy following a liquidity crisis. FTX’s founder Sam Bankman-Fried stepped down as CEO and is currently facing a probe by the United States Securities and Exchange Commission (SEC) coupled with a lawsuit from investors. Let's analyze how this happened.
What is FTX?
FTX (an abbreviation of “Futures Exchange”) is a cryptocurrency exchange based out of the Bahamas. It was founded by an MIT graduate, investor, and entrepreneur Sam Bankman-Fried (SBF), in May 2019. Until recently, FTX was the third largest cryptocurrency exchange by volume after Binance and Coinbase and had a valuation of $32 billion.
Two years before FTX, SBF founded a quantitative trading firm called Alameda Research, which played no small role in the FTX crash.
What Happened to FTX?
The collapse of FTX occurred within a ten-day period in November 2022. Here is the timeline of events.
On Nov. 2, 2022, Coindesk published a report based on a leaked balance sheet of Alameda Research, FTX’s affiliated trading firm, citing evidence of its potential leverage and solvency problems. According to the leaked data, the company’s books heavily relied on FTT, FTX’s native currency. Unsurprisingly this revelation sparked mass withdrawals among FTX users.
On Nov. 6, 2022, Binance announced its plans to sell its entire FTX token (FTT) holdings, worth about $529 million at the time, following the speculation of FTX’s insolvency. Needless to say, such news has increased the volume of withdrawals from FTX even further.
On Nov. 8, 2022, as FTX’s finances were in crisis, Binance decided to sign a non-binding letter of intent to buy its smaller rival. This seemed like a solution to FTX’s liquidity problem; however, after reviewing the company's internal data, Binance backed out. The world’s largest cryptocurrency exchange said that they have decided to walk away from the deal after their corporate due diligence revealed possible evidence of FTX mishandling customer funds.
On Nov. 9, 2022, the SEC and the CFTC began their investigation on FTX and Alameda.
On Nov. 10, 2022, Bahamian regulators froze the assets of FTX Digital Markets, FTX’s Bahamian subsidiary, after news of FTX seeking $9 billion in bailouts from several different funds. FTX warned its customers of a trading pause.
On Nov. 11, FTX filed for bankruptcy, and Sam Bankman-Fried resigned.
Why did FTX collapse?
The massive surge of withdrawals, beginning from Nov. 2, proved that FTX did not possess sufficient funds in reserves to cover all customer holdings.
According to a report published by the Wall Street Journal, Sam Bankman-Fried disclosed to an investor that FTX lent billions of dollars of customer funds to Alameda Research to fund risky trading bets.
The future of FTX is currently in serious jeopardy. As of mid-November 2022, withdrawals on FTX are disabled, and the company strongly advises against depositing.
The SEC, the CFTC, and the Department of Justice (DOJ) are reportedly in the process of investigating FTX for civil and criminal violations of securities laws. FTX’s founder, Sam Bankman-Fried, is likely to face criminal charges.
We sincerely hope that justice will be done and that every FTX user will regain access to their funds.