FTX was a top cryptocurrency platform where users could buy and sell crypto. However, within a few days, the 32-billion-dollar company was worthless. FTX entered into bankruptcy, creating waves of shock in the overall crypto industry.
FTX’s CEO, the 30-year-old Sam Bankman-Fried, a generous philanthropist and leader in crypto, is now questioned for the mismanagement of billions of customer funds.
How it all started
Everything started when CoinDesk published an article about liquidity concerns of Alameda Research, a trading firm related to FTX. The article revealed that Alameda held a position of $5 billion in FTT, the native token of FTX and not in a fiat currency or other cryptocurrency.
Following the news, the CEO of Binance, Changpeng Zhao (CZ), on 6th November, publicly announced that Binance would liquidate its FTT position – about $529 million – as part of its risk management practices.
The beginning of the end
CZ’s announcement created what traditional finance calls a “bank run,” causing extensive pressure on FTX, which struggled to meet customer withdrawal requests estimated at $6 billion in the following few days.
In two days, FTT’s value dropped by 80%. On 8th November, Binance announced that it had entered into a non-binding agreement to acquire FTX, which would solve the liquidity issues.
However, in the next 24 hours, Binance withdrew from the deal over concerns of mishandled customer funds.
On 11th November, FTX filed for bankruptcy.
A domino effect on the crypto industry?
Many financial crime experts compared the FTX collapse and warned about a potential domino effect on the rest of the crypto industry.
For example, BlockFi filed for bankruptcy on 28th November 2022 due to a $275 exposure to FTX. BlockFi has more than 100,000 creditors and estimates that it has between $1 billion and $10 billion in assets and liabilities.
Other crypto platforms announced their exposure to FTX, such as:
- Genesis Trading
- Galois Capital
- Galaxy Capital
Most companies stated they are not at risk, although some have significant exposure to FTX. Nevertheless, the collapse of FTX will negatively affect the crypto industry, shaking investors’ trust in crypto.
Following the failure of FTX, John J. Ray III has replaced Sam Bankman-Fried as the CEO who stated: “I have over 40 years of legal and restructuring experience… Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here”.
The collapse of FTX resulted from basic corporate controls, including risk management and lack of financial information. FTX collapse raised several questions:
- Why FTX transferred clients’ funds to Alameda Research.
- Whether FTX has violated securities laws
- Corporate governance issues
- Mismanagement and fraud on the part of Sam Bankman-Fried
Additionally, celebrity boosters of FTX, including prevalent athletes and investors, were sued for falsely representing a deceptive product to dupe vulnerable investors.
The effects of the FTX collapse are to be felt by its creditors (estimated to be more than 1 million) and in the overall crypto industry.
The ultimate and potential domino effects of the FTX collapse on the crypto industry are yet to be seen.