Here’s everything that went wrong with FTX

The sudden and catastrophic collapse of FTX caused repercussions throughout the cryptocurrency industry. What was once the third-largest cryptocurrency exchange is now on a death spiral that leaves billions of dollars in limbo.

If you’re wondering how FTX managed to get there, you’ve come to the right place. Here’s a play-by-play of everything that went wrong.

FTX is a Bahamas-based cryptocurrency exchange. It was founded by Sam Bankman-Fried in 2019 and allows users to buy, sell, hold and trade cryptocurrencies (although these functions are currently unavailable due to the collapse of the company).

In its heyday, FTX spent its money on a number of sponsorship deals. As the home stadium of the Miami Heat became the FTX Arena, the company also entered into an agreement with the Mercedes-Benz Formula 1 team and sponsored the professional esports organization Team SoloMid (TSM), which was called TSM FTX for a while. All these offers are canceled now, of course.

Celebrity endorsers for FTX included Tom Brady and his wife, Gisele Bündchen, who signed on as an environmental and social initiatives advisor, in addition to other stars like NBA athlete Stephen Curry, tennis star Naomi Osaka and many more.

It even saved time for a Super Bowl commercial starring Larry David as a loser who misses out on developments like the wheel, electricity, and of course, crypto. Some of FTX’s famous sponsors have been named in a class action lawsuit against the company.

Bankman-Fried served as CEO of the company from its inception until FTX filed for bankruptcy. After Bankman-Fried’s resignation, John J. Ray III took over to help lead the company through a massive restructuring process.

Before we dive into FTX’s downfall, let’s backtrack a bit. The cryptocurrency industry as a whole has faced a number of challenges this year. An uncertain economy coupled with the collapse of the Terra protocol, which powered the stablecoin TerraUSD and its sister token Luna, triggered a domino effect that caused several other companies to go bankrupt throughout 2022.

This so-called “crypto winter” culminated in many companies, including Three Arrows Capital, Celsius, and Voyager Digital, filing for bankruptcy over the summer. While things still looked good for FTX at this point — in fact, Bankman-Fried has boosted its reputation by publicly attempting to bail out other struggling crypto firms — it didn’t last very long.

Things started to go downhill for FTX when CoinDesk released a damning report on Alameda Research, the crypto exchange also owned by Bankman-Fried. According CoinDeskAlameda Research relied heavily on FTX’s native FTT token and made up the majority of its assets on Alameda’s balance sheet.

This raised concerns about the intertwined nature of the two businesses and their potential to manipulate — and artificially inflate — the value of FTT, posing even bigger problems for Bankman-Fried. After this was revealed, Changpeng “CZ” Zhao, the CEO of crypto exchange Binance, announced his intention to sell Binance’s FTT holdings, causing panicked investors to withdraw their funds from FTX.

The result was a run on the bank that caused FTX to process more customer withdrawals than it could actually afford. FTT has since plunged in value. It peaked around $50 in March before dropping to just over $1 at the time of writing.

Well, maybe. On Nov. 8, Binance signed a letter of intent to buy FTX, but included a clause saying the deal was non-binding, then pulled out of the deal a day later, saying the issues of FTX were beyond its “control or ability to assist”.

Binance’s announcement cited “news reports regarding mismanaged client funds and alleged investigations by U.S. agencies.” This is because, around the same time, a report of The Wall Street Journal reported that FTX used approximately $10 billion in client assets to fund risky bets at Alameda Research, and Bloomberg released a report that US regulators are investigating whether FTX has truly mismanaged user funds.

FTX and Alameda Research filed for Chapter 11 bankruptcy on Nov. 11, and it was also when Bankman-Fried stepped down as CEO. The filing reveals a number of internal problems at FTX, including the possibility that the company has not even verified the number of users on its platform and that it does not have an “accurate list of bank accounts and account signatories”, that is. .. pretty bad.

Former employees describe issues similar to The Wall Street Journal, noting that the company had poor record keeping “that left its profits and losses unclear”. Tara Mac Aulay, who helped Bankman-Fried start Alameda Research, said on Twitter that she and a group of others resigned “over concerns about risk management and business ethics”.

John J. Ray III, the new CEO of FTX, who also came to reorganize Enron after that company’s collapse, wrote in the filing that he had never “seen such a complete failure of corporate controls and a such a complete absence of trustworthy financial information as has happened here. .” If you’re interested in digging into it all — and reading how Ray roasts FTX and Bankman-Fried — my colleague Liz Lopatto breaks it down here.

Later court documents, such as one detailing all of the entities that FTX and Alameda Research owe money to, also reveal questionable activity. The filing says Alameda owes its top 50 creditors more than $3 billion – and that includes the $55,000 he owes Jimmy Buffett’s Margaritaville resort in the Bahamas.

After telling the Twitterverse he’d “screwed up,” Bankman-Fried posted a series of (literally) single-letter tweets spelling out the words “what happened” leading to a endless twitter thread. “A few weeks ago, FTX was processing ~$10 billion/day in volume and billions in transfers,” Bankman-Fried said. wrote in a tweet. “But there was too much leverage, more than I thought. A run on the bank and the stock market crash depleted liquidity.

In a letter to staff obtained by Bloomberg, Bankman-Fried apologized to employees and explained that FTX’s collateral (the assets a debtor will seize if the borrower can’t repay their loan) has been reduced from $60 billion to just $9 billion. . Although Bankman-Fried did not specify which assets of FTX constitute this collateral, CoinDeskThe initial report from Alameda has used $2.16 billion of FTX’s FTT token as collateral when underwriting loans.

Let’s not forget that wave of “unauthorized” transactions that robbed FTX of another $477 million (which the thief continues to launder). We still don’t know who is behind the theft, but some skeptics believe it was an employee inside FTX.

Crypto investors are worried. The collapse of an exchange as big as FTX means it can also happen to others, like Crypto.com or Binance.

This overall uncertainty led the lending arm of leading crypto brokerage Genesis to suspend loan buybacks and new originations as it could not afford to process the abnormal number of withdrawals it received after the crash. collapse of FTX. According Bloombergthe company’s creditors are currently exploring their options to prevent the company from filing for bankruptcy.

But Genesis isn’t the only company struggling in the wake of FTX’s downfall. BlockFi, a company that allows users to buy, sell and trade cryptos, suspended withdrawals before filing for Chapter 11 bankruptcy on Nov. 28. In the company’s bankruptcy filing, it lists FTX as its second largest creditor with $275 million.

To reassure investors, some exchanges have pledged to publish proof of reserves to show users that they are not using their money to fund risky bets. But as my colleague Mitchell Clark notes, this data doesn’t prove much, because it only reveals how much money these companies have in their reserves, not how much they owe other companies.

We don’t really know yet. Bankman-Fried’s net worth plummeted 94% in a single day, from around $16 billion to $1 billion, according to analysis by Bloomberg. In a recent interview with AxiosBankman-Fried says he has $100,000 left in his bank account.

A report of Bloomberg reports that US and Bahamian authorities have discussed extraditing Bankman-Fried to the US for questioning, but we still don’t know if he will face criminal charges. The former CEO, however, was ordered to appear at a hearing on February 2, 2023 as part of the Texas State Securities Board’s investigation into whether FTX violated Texas securities laws.

Bankman-Fried is also expected to be interviewed during The New York Times’ Dealbook Summit at 5 p.m. ET on November 30 and will also appear as a guest during a Twitter Space meeting organized by Mario Nawfal, founder of International Blockchain Consulting, on December 1st.

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