FTX is the prime example of how the rise and fall of exchange platforms can be swift and dramatic in the cryptocurrency space. Launched in 2019, FTX had quickly become a popular choice among crypto traders. It offered a range of services including spot markets, derivatives, options, and leveraged products.
Founded by Sam Bankman-Fried, an MIT graduate and former trader at Jane Street Capital FTX seemed to be on a trajectory of unstoppable growth. The exchange also introduced its own digital token, $FTT. It was designed to offer various benefits to its holders, including trading discounts and rewards in the form of non-fungible tokens (NFTs).
As with many exchange tokens, the value and appeal of $FTT were closely tied to the platform’s overall performance and reputation. In less than three years, the $FTT, along with the platform, faced a catastrophic downfall due to a combination of factors that culminated in a crisis of confidence and liquidity, ultimately leading to its collapse.
Inception and growth
FTX was initially incorporated in Antigua and Barbuda but later moved its headquarters to The Bahamas in September 2021. The platform’s Bahamian entity, FTX Digital Markets Ltd., was regulated by the Securities Commission of the Bahamas (SCB) and did not offer services to US residents. American crypto traders could access FTX through its US counterpart, FTX US, a registered entity with the Financial Crimes Enforcement Network (FinCEN).
Despite operating as separate entities, FTX and FTX US shared management, capital sources, and marketing strategies. They also had common investors and celebrity endorsements, enhancing their visibility and credibility in the crypto world. High-profile partnerships and sponsorships, including naming rights for sports venues and endorsements from celebrities like Stephen Curry, added to FTX’s allure.
The downfall
The story of FTX’s downfall is a complex saga of rapid expansion, financial mismanagement, and market volatility. In late 2021 and early 2022, the cryptocurrency market began to wobble as Bitcoin’s ($BTC) value drastically declined from its early 2021 peak, leading other cryptocurrencies to follow suit.
Many major platforms struggled to stay afloat, with some shutting down. In contrast, FTX seemed to defy these market trends, not only maintaining its operations but also actively acquiring competitors. However, the facade of stability and growth that FTX projected came crashing down in November 2022.
A pivotal moment occurred when CoinDesk published an article revealing that Alameda Research, also founded by Sam Bankman-Fried, was heavily reliant on FTX’s digital token, FTT. Alameda’s assets, valued at $5 billion, were significantly tied to FTT, raising concerns about the lack of diversification and the close interdependence between FTX and Alameda.
The situation worsened when FTX’s balance sheet was leaked, revealing a staggering $9 billion in liabilities against a mere $900 million in liquid assets. This imbalance resulted in a negative $8 billion balance, with poorly labelled entries exacerbating the lack of clarity in the company’s financial health.
The crisis escalated rapidly. Binance, a major competitor and one of FTX’s early investors, initially agreed to acquire FTX on 8 November 2022. However, the deal fell apart as Binance cited concerns over the mishandling of customer funds and ongoing US investigations.
The collapse of FTX started unfolding, with the value of $FTT plummeting and triggering a massive withdrawal of funds by FTX customers. This mass exodus of capital, reminiscent of the collapses of other platforms like Celsius Network and Voyager Digital, left FTX in a precarious position.
As billions of dollars flowed out, Bankman-Fried directed Alameda Research to liquidate assets to cover the withdrawals. He also sought financing to bridge the approximately $8 billion gap between the company’s liabilities and available assets. In a desperate move, FTX blocked customers from withdrawing funds, leaving hundreds of thousands without access to their money. Ultimately, FTX’s inability to cover the $8 billion gap led to its bankruptcy filing.
Lawsuit and fraud trial
Following the bankruptcy filing, the legal repercussions for the exchange and its founder Sam Bankman-Fried following their dramatic downfall were swift and severe. On 12 December 2022, authorities arrested Bankman-Fried on multiple charges related to the FTX scandal. He was indicted by the US District Court on eight criminal charges, encompassing a range of serious offences including money laundering, wire fraud, campaign finance violations, and securities fraud.
As the legal proceedings unfolded, efforts to recover lost assets were also underway. By January 2023, authorities had successfully recovered $5 billion in cash and liquid assets, a substantial portion of the estimated $8 billion in total assets that were missing. The legal challenges for FTX extended beyond criminal charges. On November 15, 2022, investors filed a class action lawsuit against FTX and its celebrity endorsers.
The civil suit accused FTX of engaging in “false representation and deceptive conduct”. It also alleged that FTX operated a Ponzi scheme, misusing funds and illicitly moving customer money between different entities. The culmination of these legal battles came on 2 November 2023, when Bankman-Fried was found guilty on seven federal counts in a court of law.
The convictions included two counts of wire fraud conspiracy, two counts of wire fraud, one count of conspiracy to commit money laundering, one count of conspiracy to commit commodities fraud, and one count of conspiracy to commit securities fraud.
FTX 2.0: A potential rebirth
Despite the dramatic downfall of FTX, there are emerging discussions about a possible restructuring and revival of the platform under new ownership. As of now, FTX’s website remains inactive, signalling the pause in its operations since the scandal broke. However, the notion of an FTX 2.0 has gained traction, with at least three parties reportedly expressing interest in acquiring and rebooting the failed exchange.
Impact on investors and the crypto market
The aftermath of FTX’s collapse has been far-reaching, impacting not only the direct investors and users of the platform but also the wider cryptocurrency market. The loss of confidence and the ripple effects of the scandal have prompted a reevaluation of investment strategies and risk assessments across the sector. The FTX scandal has also intensified the call for more robust regulatory frameworks in the cryptocurrency industry. The lack of oversight and transparency that contributed to the downfall of FTX has highlighted the need for clearer regulations and stricter enforcement to protect investors and maintain market integrity.
