If you’re even nominally interested in cryptocurrency, you would have surely heard about the collapse of the FTX cryptocurrency exchange and the consequent arrest of its founder and CEO, Sam Bankman-Fried at the end of 2022. Its swift collapse sent shockwaves through the cryptocurrency market, wiping out billions of dollars in value in just over one week and bringing to light key weaknesses and bad practices within the very fundamentals of this booming but highly volatile market.
Let’s look at the FTX crash, how it came to be, and its devastating aftermath.
What is FTX?
FTX was mainly a cryptocurrency exchange where investors could buy and sell various cryptocurrencies, such as bitcoin and dogecoin. It also issued its own token called FTT. Prior to the crash, FTX was the third largest cryptocurrency exchange in the world, making Sam Bankman-Fried the 41st richest American and 60th richest person in the world[1].
The Beginning of the End: A Timeline of a 10-Day Crash
The wheels of the FTX collapse were set in motion after CoinDesk, a crypto news site, published an article on 2 Nov 2022 that revealed over $5 billion dollars worth of FTT, the native token issued by FTX, were owned by their partner firm, Alameda Research, and being used to make risky loans. This caused serious concerns about undisclosed leverage and solvency, as it basically boiled down to a diversion of customer funds from FTX to Alameda Research, both owned by Sam Bankman-Fried.
The first big domino that fell was the 6 Nov 2022 announcement by Changpeng “CZ” Zhao, the founder of rival crypto exchange Binance, of the sale of $500 million worth of FTT owned by him in light of this revelation. This sparked off a wave of FTT sales as investors hurried to sell their own tokens, which saw FTT’s value plummet, creating a massive liquidity problem when investors demanded their money back instantly. Bankman-Fried struggled to find the necessary funding at which point Binance itself announced it would be buying the non-US business of FTX on 8 Nov 2022 only to back out of the acquisition just one day later on 9 Nov 2022 after their due diligence raised concerns about various issues including mismanagement of customer funds. On 10 Nov 2022, authorities announced that they would be actively investigating FTX and the Bahamas froze the assets of FTX’s Bahamian subsidiary, leading to a public apology and resignation by Bankman-Fried on 11 Nov 2022. Finally, FTX filed for bankruptcy.
The rest of 2022 saw the Bahamas take control of FTX’s cryptocurrency assets, an alleged hack into their systems suspected to have resulted in $477 million being stolen as well as the eventual arrest of Bankman-Fried. Class action lawsuits were filed against Bankman-Fried in Florida, as well as a number of its celebrity endorsers.
The Aftermath
Following the FTX crash, other crypto exchanges saw client withdrawals increase drastically, prompting many crypto lenders to halt customer withdrawals completely. The values of almost all other cryptocurrencies including Bitcoin plummeted across the board as well. It is surmised that such volatility might lower the overall credibility of this already highly speculative digital asset industry and deter future investors from cryptocurrency altogether. The recovery process is expected to take several months and FTX customers will never fully receive their money.
[1] https://en.wikipedia.org/wiki/Sam_Bankman-Fried
Key Takeaways
The FTX crash brought to light a number of serious issues within the cryptocurrency market. The whole fiasco was indicative of the lack of regulation and accountability in an industry that functions primarily outside conventional banking and financial systems and rules. While cryptocurrency trading is currently basically a bet on a future where money and currency aren’t controlled by governments, the FTX crash also showed that government regulations and intervention could actually be useful in certain instances. It is highly doubtful that a majority of FTX investors will get all their money back as crypto exchanges like FTX are mostly unregistered and there are no special protections in place for investors.