The collapse of FTX

 

The collapse of FTX

 

Source: investopedia.com 

·      FTX collapsed in early November, 2022 following a report by CoinDesk, highlighting potential leverage and solvency concerns involving FTX-affiliated trading firm Alameda Research.

·      FTX lost billions at the time, falling below a $1 trillion valuation.

·      With the confrontation of liquidity crisis in November, 2022; rival exchange Binance considered buying portions of the company but quickly backed out.

·      By Nov, 11, 2022, FTX’s CEO stepped down and the company filed for bankruptcy.

·      In the hours following, FTX experienced a possible hack, during which hundreds of millions worth of tokens were stolen.

·      FTX founder and ex-CEO Sam Bankman-Fried was arrested in The Bahamas. He pleaded innocent to all criminal charges on Jan. 3, 2023.

FTX’s collapse took place over a 10-day period in November, 2022. This was revealed by CoinDesk that revealed that Alameda Research, the quantitative firm also run by Bankman-Fried, held a position valued at $5 billion in FTT, the native token of FTX.

The report by CoinDesk revealed that Alameda’s investment foundation was also in FTT, the token that its sister company had invented. This prompted concerns across the cryptocurrency industry regarding Bankman’s companies’ undisclosed leverage and solvency.

 

FTX Collapse Timeline-2022

o   Nov. 6: Rival exchange Binance sells all FTT tokens.

o   Nov. 7: FTX announces liquidity crisis, seeks bailout from Binance.

o   Nov. 8: Binance says it will buy FTX’s non-U.S. business.

o   Nov. 9: Binance walks away from FTX acquisition.

o   Nov. 10: The Bahamas freezes assets of FTX’s subsidiary there; Bankman-Fried admits non-U.S. businesses’ liquidity crisis, commands Alameda Research to wind down.

o   Nov. 11: Bankman steps down as FTX CEO. FTX files for Chapter 11 bankruptcy protection.

o   Nov. 12: FTX reports an alleged hack, suspected to be up to $477 million, and moves its digital assets to cold storage for security reasons.

o   Nov. 18: The Bahamas takes control of FTX assets held there.

o   Dec. 12: Bankman is arrested by Bahamian authorities; and later extradited to the U.S.

o   Dec. 22: Bankman is released on a $250 million bond, the largest in history, by a federal judge.

The percussions:
1. Binance sells all its FTT tokens. The world’s largest crypto exchange, Binance, announced on Nov. 6 that it would ‘sell its entire position in FTT tokens’-roughly 23 million FTT tokens valued at about $529 million. Binance CEO, Changpeng “CZ” Zhao said the liquidation of the FTT was decided on risk management, following the collapse of the Terra (LUNA) crypto token earlier in 2022.

By the next day, FTX experienced liquidity crisis. Bankman attempted to reassure FTX investors that its assets were stable, but customers demanded withdrawals worth $6 billion in the days immediately, following the CoinDesk report. The value of FTT fell by more than 80% in two days.

2. Binance cancels deal to bail out FTX

The promise of a rescue by Binance was short-lived, as Binance backed out of the deal a day later. On Nov. 9, Binance announced about the cancelation of the FTX deal, raising concerns about the mishandling of customers funds, among other issues.

3. FTX assets frozen

On Nov. 10, The Bahama’s securities regulator froze the assets of FTX Digital Markets, following the news about Bankman’s seek up to $8 billion in capital to bail out the exchange. On the same day, California Department of Financial Protection and Innovation announced to initiate an investigation into FTX.

4. Bankman apologized for the liquidity crisis and admitted on Twitter (now X) that FTX’s non-U.S. exchange had insufficient funds to meet customers demands. He further said that Alameda would wind down trading.

5. Bankman steps down as CEO, filing FTX for bankruptcy

On Nov. 11, Bankman stepped down as CEO of FTX, and was replaced by court-appointed FTX CEO John Ray, who led energy trading firm Enron.

6. FTX filed for Chapter 11 bankruptcy protection the same day, revealing that roughly 130 other affiliated companies were also part of the proceedings. The bankruptcy filings indicated that FTX had assets and liabilities each in the range of $10 billion to $50 billion.

7. Investors and customers have lost billions, and not all of it will be recovered.  

8. Within hours of filing for bankruptcy, FTX said it was the victim of ‘Unauthorized Transactions’, and would move its digital assets to cold storage for security purposes. Analysts suspected about $477 million was stolen from FTX in the alleged hack.

9. On Nov. 16, Florida federal court alleged Bankman against the creation of fraudulent cryptocurrency schemed to lure investors from across the U.S. Investors consisted of celebrities and professional athletes Steph Curry, Naomi Osaka, Larry David, and Keven O’Leary, among others.

10. The Bahamas’ Securities Commission of The Bahamas (SCB) takes control of the FTX Digital Assets on Nov. 18.

11. On Dec. 12, 2022, Bankman was jailed in connection with multiple fraud charges.

12. On Dec. 22, 2022, Bankman was released from the custody after his attorneys and federal prosecutors agreed to a $250 billion bond, the largest in the history.

13. On Jan. 3, 2023, Bankman-Fried pleaded not guilty to all criminal charges in a federal court in New York. He is set to face trial on eight charges on Oct. 2, 2023.

14. As of mid-November, 2022, withdrawals were disabled and a notice on the FTX website said the company ‘strongly advise(s) against depositing’. These consequences deterred investors; and investors are already concerned about stability and security.