A General View on the Developments Concerning FTX

Cryptocurrencies are once again on everyone’s lips after one of the largest trading platforms for cryptocurrencies, FTX.com, with a market valuation of $32 billion, filed for bankruptcy on November 11, 2022 [1]. The cause was a liquidity shortage of the crypto exchange founded by Sam Bankman-Fried and headquartered in the Bahamas as a result of a bank run [2].

But how could it have come to this?

Following previous public jibes by FTX CEO Sam Bankman-Fried against Changpeng Zhao (CEO of the world’s largest cryptocurrency trading platform Binance) regarding the investigation of Binance by U.S. regulators [3], Zhao published on November 6, 2022 [4] his intention to divest the stake in FTT [a] held by Binance, then valued at approximately $529 million [5]. Zhao referred to this measure as “post-exit risk management” [6], as Alameda Research, another company founded by Sam Bankman-Fried and affiliated with FTX, holds a large portion of its balance sheet assets in FTT and at the same time needs to service large loans, some of which are in turn secured by FTT [7]. As a result of the official announcement, unsettled investors began to sell their tokens, causing the price of FTT to plummet by more than 25% from the previous day [8]. Due to the market uncertainty that occurred, customers withdrew about $6 billion in deposits held by FTX within three days [9], after which the crypto exchange stopped all withdrawals of non-fiat funds [10].

On November 8, 2022 following a request for assistance from FTX, Binance announced that it had signed a non-binding letter of intent to fully acquire FTX in order to reassure investors and address the liquidity shortage that had occurred [11; 12]. Only one day later, however, Binance withdrew from this plan. The reason was the results of a corporate due diligence and investigations by US authorities against FTX [13; 14]. In the meantime, the US supervisory and regulatory authorities United States Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) as well as the US Department of Justice had started investigations into the relationship between FTX and Alameda Research due to alleged misappropriation of customer funds [15]. As a result of trading losses incurred by Alameda Research in May and June 2022 [16], FTX extended loans of approximately $10 billion to its sister company, allegedly in part from customer deposits that Alameda Research collateralized with, among other things, FTX’s own token FTT [17]. As a result, on November 10, 2022 authorities in the Bahamas froze the assets of FTX’s local trading subsidiary and its affiliates [18].

After the takeover by Binance was canceled and thus the attempt to reassure FTX’s customers failed, the crypto exchange finally lacked $8 billion to settle outstanding payout claims [19]. Finally, the FTX.com trading platform filed for Chapter 11 bankruptcy in the US on November 11, 2022. Also 130 other partly affiliated companies such as Alameda Research filed for protection from creditors under the US Bankruptcy Code [20].

In summary, FTX allegedly lent customer deposits to Alameda Research and accepted collateral in the form of FTT. Due to the enormous drop in the token price, FTX was ultimately no longer able to exchange FTT into assets in sufficient quantities to settle the customers’ payout claims.

In addition, one day after filing for bankruptcy on November 12, 2022 a hacker attack stole more than $400 million worth of cryptocurrencies from FTX [21]. To subsequently disguise the path of the money, the attackers have to date attempted to exchange the captured assets multiple times for other tokens such as Ether and Bitcoin via decentralized exchanges. However, due to the transparency of transactions on the blockchain, the hacker’s wallets could already be identified and marked. In addition, crypto exchanges around the world have been urged to freeze the accounts in question in case of withdrawal attempts [22]. On November 13, 2022 investigations were also launched against FTX by government authorities in the Bahamas to investigate “criminal misconduct” [23].

The insolvency of the trading platform FTX.com has had an impact on the entire crypto market. For example, numerous coins such as Ether and Solana, as well as Bitcoin, have fallen further as a result of the events [24]. In addition to the institutional investors involved in FTX with several billion dollars, such as Black Rock, Sequoia Capital, and Temasek [25], especially the more than five million investors worldwide on the platform at peak times will suffer enormous losses up to the total loss of their deposits [26]. With cash balances of $1.24 billion, FTX faces more than $3 billion in outstanding receivables from the 50 largest unsecured lenders alone. By its own admission, FTX may have more than one million creditors with outstanding claims [27].

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Sources

[1] Bankman-Fried, S. (2022). Twitter. 11.11.2022. https://twitter.com/SBF_FTX/status/1591089317300293636?ref_src=twsrc%5Etfw, Zugriff: 04.12.2022.

[a] FTT is a token issued by FTX based on the ERC20 standard. For more information see Krause, F. (2022) ERC20 Token Standard einfach erklärt. https://blockchainwelt.de/erc20-token-ethereum-einfach-erklaert/

[2] Sigalos, M. (2022). Sam Bankman-Fried steps down as FTX CEO as his crypto exchange files for bankruptcy. CNBC. 11.11.2022. https://www.cnbc.com/2022/11/11/sam-bankman-frieds-cryptocurrency-exchange-ftx-files-for-bankruptcy.html, Zugriff: 04.12.2022.

[3] Finews.ch (2022). Crypto Wars: Zwei Krypto-Milliardäre schlagen um sich. 08.11.2022. https://www.finews.ch/news/finanzplatz/54234-binance-ftx-alameda-streit-sam-bankman-fried-changpeng-zhao-twitter, Zugriff: 07.12.2022.

[4] CZ Binance. 2022. Twitter. 06.11.2022. https://twitter.com/cz_binance/status/1589283421704290306, Zugriff: 04.12.2022.

[5] Kharif, O. (2022). Binance To Sell $529 Million of Bankman-Fried’s FTT Token. Bloomberg. 06.11.2022. https://www.bloomberg.com/news/articles/2022-11-06/binance-to-sell-529-million-of-ftt-token-amids-revelations#xj4y7vzkg, Zugriff: 04.11.2022.

[6] CZ Binance. (2022). Twitter. 06.11.2022. https://twitter.com/cz_binance/status/1589374530413215744, Zugriff: 04.11.2022.

[7] Allison, I. (2022). Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet. Coindesk. 02.11.2022. https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/?outputType=amp, Zugriff: 04.11.2022.

[8] Draht, M. (2022). Sorge um FTX. Der FTT-Kurs bricht nach Insolvenzgerüchten ein. BTC-Echo. 08.11.2022. https://www.btc-echo.de/news/der-ftt-kurs-bricht-nach-insolvenzgeruechten-ein-153998/, Zugriff: 04.11.2022.

[9] Wilson, T.; Berwick, A. (2022). Crypto exchange FTX saw $6 bln in withdrawals in 72 hours. Reuters. 08.11.2022. https://www.reuters.com/business/finance/crypto-exchange-ftx-saw-6-bln-withdrawals-72-hours-ceo-message-staff-2022-11-08/, Zugriff: 04.11.2022.

[10] Wang, T. (2022). FTX Exchange Halts All Crypto Withdrawals. Coindesk. 08.11.2022. https://www.coindesk.com/business/2022/11/08/ftx-exchange-halts-all-crypto-withdrawals/, Zugriff: 04.11.2022.

[11] Bambysheva, N. (2022). Binance Intends To Acquire FTX. Forbes. 08.11.2022. https://www.forbes.com/sites/ninabambysheva/2022/11/08/binance-intends-to-acquire-ftx/?sh=12dd2481a934, Zugriff: 04.11.2022.

[12] CZ Binance. 2022. Twitter. 08.11.2022. https://twitter.com/cz_binance/status/1590013613586411520, Zugriff: 04.11.2022.

[13] Reynolds, K. (2022). Binance Walks Away From Deal to Acquire FTX. Coindesk. 09.11.2022. https://www.coindesk.com/business/2022/11/09/binance-walks-away-from-ftx-deal-wsj/, Zugriff: 04.11.2022.

[14] Binance. (2022). Twitter. 09.11.2022. https://www.coindesk.com/business/2022/11/09/binance-walks-away-from-ftx-deal-wsj/, Zugriff: 04.11.2022.

[15] Beyoud, L.; Yang, Y.; Kharif, O. (2022). Sam Bankman-Fried’s FTX Empire Faces US Probe Into Client Funds, Lending. Bloomberg. 09.11.2022. https://www.bloomberg.com/news/articles/2022-11-09/us-probes-ftx-empire-over-handling-of-client-funds-and-lending?utm_medium=social&utm_content=business&utm_source=twitter&utm_campaign=socialflow-organic&cmpid=socialflow-twitter-business#xj4y7vzkg, Zugriff: 04.11.2022.

[16] Berwick, A.; Wilson, A. (2022). Exclusive: Behind FTX’s fall, battling billionaires and a failed bid to save crypto. Reuters. 10.11.2022. https://www.reuters.com/technology/exclusive-behind-ftxs-fall-battling-billionaires-failed-bid-save-crypto-2022-11-10/, Zugriff: 04.11.2022.

[17] Huang, V. G.; Osipovich, A.; Kowsmann, P. (2022). FTX Tapped Into Customer Accounts to Fund Risky Bets, Setting Up Its Downfall. The Wall Street Journal. 11.11.2022. https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732?mod=e2tw, Zugriff: 04.11.2022.

[18] Beyoud, L.; Massa, A.; Yang, Y. (2022). Bahamas frieren Vermögenswerte der Problem-Kryptobörse FTX.com ein. Bloomberg. 11.11.2022. https://www.bloomberg.com/news/articles/2022-11-11/ftx-com-vermogenswerte-am-firmensitz-auf-bahamas-eingefroren#xj4y7vzkg, Zugriff: 04.11.2022.

[19] Jin, B.; Brown, E.; Chung, J. (2022). FTX Needs $8 Billion, Bankman-Fried Tells Investors. The Wall Street Journal. 09.09.2022. https://www.wsj.com/livecoverage/stock-market-news-today-11-09-2022/card/ftx-needs-8-billion-bankman-fried-tells-investors-2RSa5oqZyZZ5YrPLuZuL, Zugriff: 04.11.2022.

[20] Powell, F.; Curry, B. (2022). FTX Declares Bankruptcy. Forbes. 14.11.2022. https://www.forbes.com/advisor/investing/cryptocurrency/ftx-declares-bankruptcy/, Zugriff: 04.11.2022.

[21] Ehrlich, S. (2022). Call From Partner Of EX-FTX Leadership For ‘Urgent Help’ Had Fireblocks Racing To Protect $400 Million From Hacker. Forbes. 21.11.2022. https://www.forbes.com/sites/stevenehrlich/2022/11/21/ftx-partners-call-for-urgent-help-had-fireblocks-racing-to-protect-400-million-from-hacker/?sh=775a95151aa3, Zugriff: 04.11.2022.

[22] Kharpal, A.; Sigalos, M.; Goswami, R. (2022). FTX-owned service being used to launder hundreds of millions ‘hacked’ from FTX, researchers say. CNBC. 21.11.2022. https://www.cnbc.com/2022/11/21/ftx-theft-hackers-start-to-launder-477-million-of-stolen-crypto.html, Zugriff: 04.11.2022.

[23] Ward, J. (2022). FTX collapse being scrutinized by Bahamas authorities. Reuters. 14.11.2022. https://www.reuters.com/technology/ftx-collapse-being-scrutinized-by-bahamas-investigators-2022-11-13/, Zugriff: 04.11.2022.

[24] Powell, F.; Aras, B. (2022). Pleite der Kryptobörse FTX: Wie konnte das passieren? Forbes. 15.11.2022. https://www.forbes.com/advisor/de/geldanlage/krypto/was-passierte-mit-kryptoboerse-ftx/, Zugriff: 04.11.2022.

[25] Hoppmann, D. (2022). So viel Geld haben institutionelle Anleger im FTX-Crash verloren. BTC-Echo. 14.11.2022. https://www.btc-echo.de/news/ftx-kollaps-so-viel-geld-verloren-institutionelle-anleger-im-crash-154380/, Zugriff: 04.11.2022.

[26] Ballentine, C.; Cachero, P.; Hill, J. (2022). ‘It’s All Gone’: FTX Bankruptcy Has Retail Traders Bracing for Losses. Bloomberg. 12.11.2022. https://www.bloomberg.com/news/articles/2022-11-11/ftx-bankruptcy-crypto-traders-fear-money-is-gone-after-bankman-fried-s-fall?leadSource=uverify%20wall, Zugriff: 04.11.2022.

[27] Browne, R. (2022). Collapsed crypto exchange FTX owes top 50 creditors over $3 billion, new filing says. CNBC. 21.11.2022. https://www.cnbc.com/2022/11/21/collapsed-crypto-exchange-ftx-owes-top-50-creditors-3-billion-filing.html, Zugriff: 04.11.2022.