The Fall of FTX

One year ago, FTX was at the head of a boom in crypto currency; from high budget Super Bowl commercials featuring Hollywood Stars and professional athletes, to being a powerful sponsor of teams like the Miami Heat. All while led by the young CEO being hailed as the “new JP Morgan,” by experts like Jim Cramer. The fall of FTX has been swift, messy, and ugly, not just for the infamous Sam Bankman-Fried, but for every person who had any involvement in the company, and the entire crypto currency industry that has all but fallen apart in a disastrous 2022.

At its height, FTX was valued at a monumental $32 billion, making it one of the biggest crypto exchanges in the world. Sam Bankman-Fried himself was worth $15.2 billion at the young age of 30.  

The story begins in 2019, when CEO of Binance Changpeng Zhao, another crypto currency exchange, invested heavily in FTX during the early periods of the company. Two years later, Zhao would sell his stake in FTX in exchange for $2.1 billion worth of FTT, the currency used by FTX on their platform meaning Binance now had a huge sum of FTT and had control over its value. 

The beginning of the end for FTX began on November 2, when a sheet leaked revealed Alameda Research, Friedman-Bank’s own trading firm, reported that most of their reserves were held in FTT. As  Swan Bitcoin CEO Cory Klippsten told CoinDesk, FTT was, “FTX’s own centrally controlled and printed-out-of-thin-air token.” So Alameda Research was reliant on FTT, a coin that could vary greatly. “Alameda held far more of the tokens than traded on the market, suggesting its stake would be hard to liquidate at current prices.” In other words, FTX was worth a lot less than many had thought.

The reaction to this revelation was swift, as many companies quickly pulled out such as Binance, causing the value of FTT to drop. Changpeng Zhao and Binance liquidated all of their remaining FTT. FTT would suffer a 72% drop as a result of this. At this time, many companies started to look at a possible buy-out for FTX, but an investigation by the U.S. Securities and Exchange Commissions put an end to any chances of a buy-out. The true severity of the issue was shown on November 10th, when Bankman-Fried shut down Alameda Research to try and save FTX. Unfortunately, it would cost much more to save FTX, as Bankman-Fried would later go on to ask for a whooping $9.4 billion. Where Bankman-Fried planned to raise this money was a an even bigger mystery, according to CBC, “His FTX exchange is now scrambling to raise $9.4 billion US from both investors and rivals, as customers rush to withdraw their funds.” As people tried to get their money out of FTX, the company lost an astounding $6 billion in three days. 

The writing was on the wall for FTX and Bankman-Fried and on November 10, FTX filed for bankruptcy and Bankman-Fried stepped down as CEO. It wasn’t just FTX that was forced to shut down, as all of the companies affiliated with Bankman-Fried and FTX were also forced into bankruptcy. 

The suspicious activity wasn’t over for FTX; overnight customer funds from FTX were secretly transferred. According to a Reuters report, “The exchange’s founder Sam Bankman-Fried secretly transferred $10 billion of customer funds from FTX to Bankman-Fried’s trading company Alameda Research,” with a large portion of $1 to $2 billion disappearing into thin air. Users left in FTX now face the impossible possibility that they will lose everything they invested. As Martin Leinweber, digital asset product strategist at Market Vector Indexes, tells CNBC Make it. “There is no insurance coverage just because the exchange fails,” he says. “If there’s no bailout, depositors in FTX could lose everything.”

This was the final straw, as following this incident, the Bahamian authorities (someone didn’t want to pay taxes) started an investigation into Bankman-Fried since he was based out of the Bahamas at the time. On December 13, Sam Bankman-Fried was arrested in the Bahamas for charges of “multiple accounts of wire fraud and conspiracy related to the collapse of his cryptocurrency,” filed in the U.S. according to CBS. He was then extradited to New York and held in custody and released on bail for the sum of $250 million, making it the largest pre-trial bond ever, according to prosecutors. While many might think this means he would have to pay $250 million (money he presumably no longer has as he lost almost the entirety of his fortune), the bail means he would have to pay this amount if he didn’t show up to court or did something else illegal while awaiting trial. Bankman-Fried was charged with eight crimes, those including: money laundering, wire fraud, securities fraud, and campaign finance fraud, according to CoinDesk. 

The trial began on January 3rd, and even before the trial had begun, two former company executives had pleaded guilty to charges in connection with Bankman-Fried. According to Sanjay Wadhwa, U.S. Securities and Exchange Commission Deputy Enforcement Director, Former CEO of Alameda Research Croline Ellison and FTX co-founder Gary Wang were “active participants in a scheme to conceal material information from FTX investors, including through the efforts of Mr. Bankman-Fried and Ms. Ellison to artificially prop up the value of FTT, which served as collateral for undisclosed loans that Alameda took out from FTX pursuant to its undisclosed, and virtually unlimited, line of credit.” Despite the odds against him, Sam Bankman-Fried decided to plead not guilty, his trial will most likely be in October. 

Now without one of the major players in the industry, the future for cryptocurrency looks bleak. The disappearance of FTX has been felt around the market. According to NBC, Bitcoin’s price hovered around $17,000 as of Nov. 11, down from above $20,000 on Nov. 8 and well below the peak price of around $68,000 it reached in November 2021. Cryptocurrency has always been a gamble as the value of any crypto is simply determined by how much people pay for it and lacks the backing of something stable like the U.S. dollar. The question of what will happen to Sam Bankman-Fried will be decided later this year, but the fact remains that a man who was ranked by Forbes as the 40th richest man in the country and head of one of the most intriguing rising companies in the world, has now lost everything.