FTX Debacle in A Nutshell
- FTX, the world’s second-largest crypto exchange, goes bankrupt, a case of poor risk management if you will. Boom $6 billion withdrawn in 72 hours.
- It was a horde, panicked and frenzied looking to take their money out of FTX, but the company wasn’t able to support the withdrawals, sparking hell on the crypto industry.
The stunning collapse tale of the multi-million dollar crypto exchange FTX which was valued at $32 a billion has set a bankruptcy record and may go down as one of the most jaw-dropping crypto disasters. FTX has come to be widely influential over the past three years as a reputable exchange despite not submitting to US regulations, this also led Sam Bankman to become a global influencer in the Crypto industry.
On November 11th the crypto empire filed for bankruptcy in the US court. The fortune of the FTX founder went from $16bn to zero within days. FTX was a chaotic web of more than 100 different companies, all united under the common ownership of Bankman-Fried and his co-founders, Gary Wang and Nishad Singh.
FTX and Alameda
The tale begins with Sam Bankman as the founder of the trading company, Alameda, in 2017. The company was in charge of buying and selling cryptocurrencies, Sam wanted more, so he built FTX in 2019. The company facilitated crypto trading and also offered their customers loans.
The “liquidity issue” in FTX media stories is just a fancy way to say that customers wanted their funds returned to their accounts. FTX set aside Funds on the exchange in the hopes of buying and selling crypto in the future or rather lending loans to Sam’s companies. When FTX couldn’t give customers their money back, all hell broke loose. So where exactly are the funds?
The leaked balance sheet from Alameda listed $3.66 billion in “unlocked FTT,” referring to the token of crypto exchange FTX, as well as $2.16 billion worth of “FTT collateral.” The leaked balance sheet showed a total of $14.6 billion in assets and some $8 billion in liabilities, which include $7.4 billion worth of loans. The balance sheet and the FTT holdings further illustrated the close links between the two companies.
So it seems Alameda bought FTT tokens at low prices. Waited for its value to inch up and then began borrowing “real money” using these highly inflated FTT tokens as collateral.
“The whole operation was run by a gang of kids in the Bahamas,” a person familiar with the matter told CoinDesk on the condition of anonymity. “The gang of kids “refers to Sam’s housemates. Among the nine housemates are the FTX co-founder and Chief Technology Officer Gary Wang, FTX Director of Engineering Nishad Singh, and Ellison of Alameda.
Bankman-Fried’s trading business is at the center of the current chaotic crypto saga and on which the Wall Street Journal reported getting $10 billion of FTX customer money. The remaining six are also FTX employees.
FTX and Alameda’s employees say that they were kept in the dark about the events of the past week, adding that only CEO Bankman-Fried’s inner circle of rommies may have knowledge about the exchange’s downward spiral as reported by Wall Street.
According to individuals familiar with the matter Alameda’s CEO Caroline Ellison, whose firm played a central role in the company’s collapse and who, at times, has dated the once golden boy of the crypto world
Binance and FTX
Binance is a global crypto exchange run by 45-year-old Chinese-Canadian billionaire Changpeng Zhao aka CZ. Changpeng staked a sizeable amount but then in 2021, Sam bought out Binance’s stake in the company. Both founders never publicly admitted why they parted ways.
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.
— CZ 🔶 BNB (@cz_binance) November 6, 2022
FTX was going to collapse, but there was another twist in the tale. CZ walks in once again with main character energy and says he is willing to buy out FTX pending due diligence. And despite the rumors, it was still an amicable separation. Binance made $2.1 billion from the deal. And FTX no longer had to worry about a competitor owning a part of its business.
Faced with a liquidity crisis, FTX and Binance agreed to an acquisition. Binance then later announced it would no longer buy FTX, saying it had arrived at that decision “as a result of corporate due diligence.” It also cited regulatory investigations and reports of mishandled funds.
Binance was aiming to “de-risk” its platform after seeing “alarming trends” in the balance sheet of companies tied to Bankman-Fried specifically Alameda, according to a Binance informant who wished to remain anonymous.
The event is described as “shocking” by Sam’s employees to a surprising degree, it’s a sentiment that pours out from people who worked for him, people who you’d think would’ve had a clue. The event is said to have something to do with the luxury penthouse in the Bahamas.
Several wallets drained
Several wallets belonging to FTX were drained of hundreds of millions of dollars in coins late on Friday night, with much of the funds transferred from Tether (USDT) into stablecoin DAI, and from staked Ethereum (stETH) into Ethereum (ETH).
Movements of cryptocurrencies were taking place as crypto Twitter erupted in all manner of theories, giving jitters of a dominant weigh.
According to another blockchain tracking website DeBank, $280,726,364 in ETH, $99,276,088 in BNB, and $3,970,099 in AVAX were sent to one of the receiving cold wallets.
It took until morning, around 2 am EST for FTX US general counsel Ryne Miller, to call the transfers “unauthorized transactions” adding that FTX had begun moving assets to cold wallets to “mitigate the damage.”
https://twitter.com/0xfoobar/status/1591263210837250049?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1591265300682792960%7Ctwgr%5Efa4ee4ad480976e7142fdc3309ebe0f1b3fc6e6a%7Ctwcon%5Es2_&ref_url=https%3A%2F%2Fdecrypt.co%2F114269%2Fhundreds-of-millions-of-dollars-drained-from-ftx-overnight-in-unauthorized-transfers
This was a nightmare for anyone who had funds in FTX. CEO Sam Bankman-Fried was on a plane to Argentina, and a Reuters report claimed he used a secret “back door” built into his exchange to $10 billion to his hedge fund Alameda.
Just before midnight, an FTX Telegram administrator named Rey posted:
Ftx has been hacked. All funds seem to be gone.FTX apps are malware. Delete them. Chat is open. Don’t go on ftx site as it might download Trojans.
Different conclusions have been drawn stating that the downfall is because of the lending deal between Alameda and FTX, others say that it is a hack, and unauthorized access of customer funds was granted.
Will people get their money back?
The collapse of the crypto-exchange opens doors for rival exchange Binance and raises questions about the sector’s sustainability. As FTX crumbles down crypto traders, crypto celebrities, and customers are left to pay the price.
FTX failed because the company was a mess. 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.
Said Ray, the bankruptcy specialist.
Once people began seeing this story, they realized how precarious the situation was. They could see how both companies could capitulate very quickly. So they began withdrawing their deposits. Will FTX get back on its feet or rather be trusted with funds at all?
Court filings show that the FTX Group could have “over one million creditors in these Chapter 11 cases,” and legal experts have asserted that many customers may never get their money back. Following the departure of Bankman-Fried, FTX appointed John J. Ray III — the lawyer who managed the liquidation of Enron Corp. following its demise — to oversee the bankruptcy proceedings.
What does the FTX collapse mean for the crypto future
The conclusion is plain and obvious, the collapse proves that the government regulations in the finance sector are pretty useful.
The FTX issues are really an urgent reminder of the need for regulatory clarity and a real regulatory framework for cryptocurrency.
Christian Catalini, founder of the MIT Cryptoeconomics Lab, said on Bloomberg TV.
The implosion of FTX must be a wake up call for Congress and financial regulators to hold this industry and its executives accountable.
Too much of the crypto industry is smoke and mirrors. It's time for stronger rules and stronger enforcement to protect ordinary people.— Elizabeth Warren (@SenWarren) November 11, 2022
Lawmakers have not pulled punches yet when it comes to FTX. Democratic Ohio Senator, Sherrod Brown said Bankman-Fried should be called to testify before the senate and urged regulators to “crackdown” on the industry. Democratic Massachusetts Senator Elizabeth Warren, who has historically been critical of crypto, said the industry was mostly “smoke and mirrors” before calling for more regulation.
The crypto exchange industry has rallied around FTX to push for more regulatory clarity. The CEO of Coinbase, Brian Armstrong, penned an oped the day when FTX filed for bankruptcy, calling for sensible regulation of exchanges.
Congress will avoid a moral panic and will use the current momentum to produce legislation that provides regulatory clarity for crypto applications without hampering innovation. American customers and innovators should expect nothing less.
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