What Happened to Crypto Exchange?
Cryptocurrency exchange FTX and its founder and former CEO, Sam Bankman-Fried, are intricately linked. The rapid and damaging collapse of FTX in late 2022 will have ramifications for the international crypto community for years to come.
Learn more about what went wrong with FTX.
To take the keys
- FTX collapsed in early November 2022 after a CoinDesk report by Alameda Research highlighted leverage and solvency concerns involving trading firms affiliated with FTX.
- FTX’s collapse shook the volatile crypto market, which at the time lost billions, falling below its $1 trillion valuation.
- FTX faced a liquidity crisis in November 2022 and sought rescue funds; Rival exchange Binance considered buying parts of the company, but quickly backed out.
- By November 11, 2022, FTX’s CEO resigned and the company filed for bankruptcy.
- In the hours that followed, FTX experienced a possible hack where hundreds of millions of tokens were stolen.
- Former FTX founder and CEO Sam Bankman-Fried was arrested in the Bahamas and extradited to the United States at the end of December. He pleaded not guilty to all criminal charges on January 3, 2023.
What happened to FTX?
The collapse of FTX occurred within 10 days in November 2022. Catalyst was published by crypto news site CoinDesk on Nov. 2 when Alameda Research, a quantitative trading firm also run by Bankman-Fried, had a position valued at $5. million in FTT, FTX’s native token.
The report revealed that Alameda’s investment foundation was also in FTT, a token coined by its sister company, not fiat currency or another cryptocurrency. This raised concerns in the cryptocurrency industry about the unknown leverage and solvency of Bankman-Fried’s companies.
Sequence of Events of FTX Collapse
The following is a summary of the events that led to FTX’s bankruptcy, bankruptcy filing, and the imprisonment and extradition of its former CEO to the United States to face criminal and civil charges.
FTX Collapse Timeline-2022
- November 6: Rival exchange Binance sells all FTT tokens.
- November 7: FTX Announces Liquidity Crisis, Seeks Venture Capitalist Rescue, Then Binance.
- November 8: Binance says it will buy FTX’s US business.
- November 9: Binance pulls out of FTX acquisition after due diligence.
- November 10: Bahamas freezes assets of FTX subsidiary there; Bankman-Fried acknowledges the liquidity crunch for non-U.S. companies, says Alameda Research affiliate, which will decline.
- November 11: Bankman-Fried will step down as FTX CEO, replaced by a court-appointed CEO with restructuring experience. FTX files for Chapter 11 bankruptcy protection.
- November 12: FTX reports a suspected hack worth $477 million, moving its digital assets into cold storage for security reasons.
- November 18: The Bahamas takes control of the FTX assets there.
- December 12: Bankman-Fried has been arrested by Bahamian authorities. He was later extradited to the United States
- December 22: Bankman-Fried is released on $250 million bail, the highest in history, by a federal judge.
Binance says it will sell all its FTT tokens
Binance, the world’s largest crypto exchange, announced on November 6 that it would sell its entire position in FTT tokens, approximately 23 million FTT tokens worth about $529 million. Binance CEO Changpeng “CZ” Zhao said the exchange’s decision to liquidate its FTT position was based on risk management, following the collapse of crypto-token Terra (LUNA) earlier in 2022.
FTX Liquidity Crisis and Binance Deal
The next day, FTX experienced a liquidity crisis. Bankman-Fried tried to reassure FTX investors that their assets were stable, but clients requested $6 billion in withdrawals in the days following the CoinDesk report. Bankman-Fried sought more funding from venture capitalists before turning to rival Binance. The value of FTT has fallen by more than 80% in two days.
On November 8th, Binance announced that it had reached a non-binding agreement to buy its non-US FTX business for an undisclosed amount, effectively bailing out its closest rival, the world’s largest cryptocurrency exchange.
Binance cancels deal to rescue FTX
The promise of a bailout was short-lived, as Binance backed out of the deal a day later. On November 9, the exchange said it would cancel the FTX deal after corporate due diligence raised concerns about mismanagement of client funds, among other issues.
Frozen FTX assets and other effects
On Nov. 10, the Bahamas’ securities regulator froze the assets of FTX Digital Markets, FTX’s Bahamian subsidiary, as Bankman-Fried sought $8 billion in capital to bail out the exchange. On the same day, the California Department of Financial Protection and Innovation announced that it had begun an investigation into FTX.
Bankman-Fried apologized for the liquidity crisis the same day and admitted on Twitter that FTX’s non-US exchange did not have enough funds to meet customer demand. He said “poor internal labeling” caused FTX to miscalculate leverage and liquidity. In the same Twitter thread, Alameda said it would cancel the trade.
Bankman-Fried steps down as CEO; FTX Bankruptcy Files
Bankman-Fried stepped down as FTX CEO on Nov. 11, and was replaced by court-appointed FTX CEO John Ray, who had led energy trading firm Enron through bankruptcy proceedings years earlier.
FTX filed for Chapter 11 bankruptcy protection the same day, revealing that about 130 other affiliated companies were also involved in the proceedings. The bankruptcy filings indicated that FTX had between $10 billion and $50 billion in assets and liabilities.
Investors and customers have lost billions, and all of that will not be recovered, FTX’s CEO said at a December 13 hearing before a US House of Representatives committee on the FTX disaster.
“Unauthorized Transactions” in FTX
Hours after filing for bankruptcy, FTX said it had been the victim of “unauthorized transactions” and would move its digital assets into cold storage for security purposes. Outside analysts said about $477 million was stolen from FTX in the alleged hack.
Lawsuit against FTX, Filed by Celebrity Promoters
On November 16, a lawsuit was filed in federal court in Florida alleging that Bankman-Fried created a fraudulent cryptocurrency scheme designed to profit off sophisticated investors across the US. Curry, Shaquille O’Neal, Shohei Ohtani, Naomi Osaka, Larry David and Kevin O’Leary, who allegedly helped Bankman-Fried facilitate the plan.
The Bahamas takes control of FTX Digital Assets
The Securities and Exchange Board of the Bahamas (SCB) took control of the crypto assets held by the failed FTX exchange on November 18. SCB said it had ordered Bankman-Fried to move crypto assets into the regulator’s portfolio to protect creditors.
Arrest, charges against Bankman-Fried
Bahamian authorities arrested Bankman-Fried on December 12, 2022, and jailed him on multiple fraud charges against FTX, including those stemming from an indictment by the US Attorney for the Southern District of New York. US Attorney Damian Williams said in announcing the charges against the former CEO that it was one of the biggest financial crimes in American history. FTX CEO Ray told a US House committee on December 13 that FTX was practicing “no accounting”. He added: “It was ancient embezzlement.”
Bankman-Fried was extradited to the U.S. and subsequently indicted by a U.S. District Court in Manhattan on eight counts, among others. securities fraud and money laundering. After a Dec. 22 court hearing, a federal judge decided to release Bankman-Fried from custody after her attorneys and federal prosecutors agreed to a $250 million bond, the highest in history. The 30-year-old former crypto executive will live with the Stanford law professor’s parents in Palo Alto, Calif. He will be restricted to the Northern California area and wear an electronic monitoring bracelet.
On January 3, 2023, Bankman-Fried pleaded not guilty to all criminal charges in a New York federal court. He will be sentenced on eight charges on October 2.
The future of FTX and the consequences of the collapse
FTX’s future as a cryptocurrency exchange is in serious jeopardy. As of mid-November 2022, withdrawals were disabled and a statement on the FTX website says the company “strongly recommends[s] against the deposit.”
The wider implications of the FTX fiasco for the cryptocurrency industry will take time to unfold. As the biggest collapse in the short history of cryptocurrencies, FTX could further discourage investors who are already wary of stability and security concerns. Clients of the FTX platform may not recover their assets, potentially subjecting them to legal action. The US Securities and Exchange Commission (SEC) and other regulators may see the collapse of FTX as justification for tightening regulatory control over cryptocurrencies, and Congress may be more inclined to create new laws governing digital tokens and exchanges.
The shocking collapse of the third largest crypto exchange by volume will send shockwaves through the crypto universe for some time. As of now, crypto lender BlockFi has suspended customer withdrawals on November 11, 2022, and rumors indicate that it may face a difficult future. Crypto.com increased withdrawals from November 12-13, 2022. Genesis Global Trading suspended customer withdrawals from its crypto lending unit.
How did FTX fail?
FTX filed for bankruptcy on November 11, 2022, following a surge in customer withdrawals earlier this month. Sam Bankman-Fried then admitted that the company did not have enough assets on reserve to meet customer demand.
Is FTX hacked?
A few hours after filing for bankruptcy, FTX claimed it had been hacked. The exchange reported “unauthorized transactions” involving theft of around $500 million in assets, which were spotted by Elliptic, a crypto compliance service. The hacker continued to empty wallets for several days, using what analysts called “chain spoofing.” The hacker allegedly invested these funds in Ether (ETH).
What happens next to former director Bankman-Fried FTX?
Bankman-Fried will be tried on October 2, 2023 on eight criminal counts. After a hearing on December 22, 2022, a federal judge decided to release Bankman-Fried from custody after her attorneys and federal prosecutors reached an agreement. $250 million bond, the largest ever. He will live with the law professor’s parents in Palo Alto, California, be confined to the Northern California area and wear an electronic monitoring bracelet. On January 3, 2023, Bankman-Fried pleaded not guilty to all criminal charges in a New York federal court.
Bottom line
FTX and its former founder and CEO, Bankman-Fried, are linked. In November 2022, the FTX cryptocurrency exchange crashed in 10 days. After a report suggested potential leverage and solvency problems, the exchange faced a liquidity crisis and attempted to negotiate a bailout from rival Binance, which quickly collapsed. Its CEO was arrested, extradited to the US, released on $250 million bond, and will now stand trial in October.
The implications for the future of FTX and the impact of the collapse on the broader cryptocurrency industry are ongoing and difficult to assess.
