FTX’s sudden and catastrophic collapse sent reverberations throughout the entire cryptocurrency industry. What was once the third-largest cryptocurrency exchange is now in a death spiral that has billions of dollars left in limbo.
If you’re wondering how FTX managed to get to this point, you’re in the right place. Here’s a play-by-play of everything that went wrong.
First of all, what exactly is FTX?
FTX is a cryptocurrency exchange based in the Bahamas. It was founded by Sam Bankman-Fried in 2019 and lets users buy, sell, hold, and trade cryptocurrency (although those functions aren’t available right now due to the firm’s collapse).
In its prime, FTX spent its money on a number of sponsorship deals. While the Miami Heat’s stadium became the FTX Arena, the company also snagged a deal with the Mercedes-Benz Formula One team and sponsored the professional esports organization Team SoloMid (TSM), which was called TSM FTX for some time. All these deals are off now, of course.
Celebrity endorsers for FTX included Tom Brady and his wife, Gisele Bündchen, who signed on as an environmental and social initiatives advisor, in addition to other stars like NBA athlete Stephen Curry, tennis star Naomi Osaka, and many others.
It even bought time for a Super Bowl ad with Larry David starring as a loser who misses out on developments including the wheel, electricity, and, of course, crypto. Some of FTX’s celebrity sponsors have been named in a class-action lawsuit against the company.
Bankman-Fried served as CEO of the firm from its inception up until FTX filed for bankruptcy. After Bankman-Fried resigned, John J. Ray III took over to help lead the company through a massive restructuring process.
So, how did we get here?
Before we dive into the fall of FTX, let’s rewind a bit. The cryptocurrency industry as a whole has faced a number of challenges this year. An uncertain economy coupled with the collapse of the Terra protocol, which powered the TerraUSD stablecoin and its sister token Luna, set off a domino effect that caused several other firms to go under throughout 2022.
This so-called “crypto winter” culminated in numerous companies, including Three Arrows Capital, Celsius, and Voyager Digital, filing for bankruptcy over the summer. While things were still looking peachy for FTX at this point — in fact, Bankman-Fried burnished his reputation by publicly attempting to bail out other struggling crypto firms — this didn’t last very long.
When did things take a turn for FTX?
Things began to sour for FTX when CoinDesk published a damning report about Alameda Research, the crypto trading firm also owned by Bankman-Fried. According to CoinDesk, Alameda Research relied heavily on FTX’s native FTT token and made up the majority of its assets on Alameda’s balance sheet.
This raised concerns about the intertwined nature of the two businesses and their potential to manipulate — and artificially inflate — the value of FTT, spelling even bigger problems for Bankman-Fried. After this came to light, Changpeng “CZ” Zhao, the CEO of the crypto exchange Binance, announced his plans to sell Binance’s FTT holdings, causing panicked investors to withdraw their funds from FTX.
The result was a run on the bank that had FTX processing more customer withdrawals than it could actually afford. FTT has since plunged in value. It reached a peak of around $50 in March before dropping to a little over $1 at the time of writing.
But wasn’t Binance supposed to buy FTX?
Well, maybe. On November 8th, Binance signed a letter of intent to buy FTX but included a clause noting the agreement was nonbinding and then backed out of the deal just a day later, stating FTX’s issues were beyond its “control or ability to help.”
Binance’s announcement cited “news reports regarding mishandled customer funds and alleged US agency investigations.” That’s because, around the same time, a report from The Wall Street Journal indicated that FTX used about $10 billion in customer assets to fund risky bets at Alameda Research, and Bloomberg published a report that US regulators are looking into whether FTX really did mishandle user funds.
When did FTX file for bankruptcy?
FTX and Alameda Research filed for Chapter 11 bankruptcy on November 11th, and that’s also when Bankman-Fried stepped down as CEO. The filing reveals a number of internal issues at FTX, including the possibility that the company has not even verified the number of users on its platform and that it doesn’t possess an “accurate list of bank accounts and account signatories,” which is... pretty bad.
Former employees describe similar issues to The Wall Street Journal, noting that the firm had bad record-keeping “that left its profits and losses unclear.” Tara Mac Aulay, who helped Bankman-Fried start Alameda Research, says on Twitter that she and a group of others quit “due to concerns over risk management and business ethics.”
John J. Ray III, FTX’s new CEO who also came in to reorganize Enron after that company fell apart, writes in the filing that he’s never “seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” If you’re interested in digging into the whole thing — and reading how Ray roasts FTX and Bankman-Fried — my colleague Liz Lopatto breaks it down here.
Subsequent court filings, such as the one that details all the entities that FTX and Alameda Research owe money to, also reveal some questionable activity. The filing states that Alameda owes its top 50 creditors over $3 billion — and that includes the $55,000 it owes to Jimmy Buffett’s Margaritaville beach resort in the Bahamas.
How did Bankman-Fried respond?
After telling the Twitterverse that he “fucked up,” Bankman-Fried posted a series of single-letter tweets (literally) spelling out the words “what happened” leading up to a long-winded Twitter thread. “A few weeks ago, FTX was handling ~$10b/day of volume and billions of transfers,” Bankman-Fried writes in one tweet. “But there was too much leverage—more than I realized. A run on the bank and market crash exhausted liquidity.”
In a letter to staff obtained by Bloomberg, Bankman-Fried apologized to employees and explained that FTX’s collateral (the assets a debtor will seize if the borrower can’t pay back their loan) decreased from $60 billion to just $9 billion. While Bankman-Fried didn’t break down which of FTX’s assets make up that collateral, CoinDesk’s initial report indicates that Alameda used $2.16 billion worth of FTX’s FTT token as collateral when taking loans out.
Oh yeah... about those missing funds
Let’s not forget about that wave of “unauthorized” transactions that robbed FTX of an additional $477 million (that the thief continues to launder). We still don’t know who’s behind the theft, but some skeptics believe it was an employee on the inside of FTX.
What effect did FTX’s fall have on the crypto market?
Crypto investors are worried. The collapse of an exchange as big as FTX means it can happen to other ones, too, like Crypto.com or Binance.
This overall uncertainty led the lending arm of the major crypto brokerage Genesis to suspend loan redemptions and new originations, as it couldn’t afford to process the abnormal number of withdrawals it received following FTX’s collapse. According to Bloomberg, the company’s creditors are currently exploring their options to keep the company from filing for bankruptcy.
But Genesis isn’t the only firm struggling in the wake of FTX’s downfall. BlockFi, a company that lets users buy, sell, and trade crypto, suspended withdrawals before filing for Chapter 11 bankruptcy on November 28th. In the company’s bankruptcy filing, it lists FTX as its second-largest creditor at $275 million.
In a bid to reassure investors, some exchanges have committed to publishing proof of reserves to show users that they aren’t using their money to fund risky bets. But as my colleague Mitchell Clark notes, this data doesn’t really prove much, as it only reveals the amount of money that these companies have in their reserves — not the amount they owe to other firms.
What’s going to happen to Bankman-Fried now?
We don’t really know yet. Bankman-Fried’s net worth plummeted by 94 percent in a single day, going from around $16 billion to $1 billion, according to an analysis by Bloomberg. In a recent interview with Axios, Bankman-Fried claims he has $100,000 left in his bank account.
A report from Bloomberg indicates that American and Bahamian authorities have been in talks about extraditing Bankman-Fried to the US for questioning, but we still don’t know if he’ll face criminal charges. The former CEO has, however, been ordered to appear in a February 2nd, 2023, hearing as part of the Texas State Securities Board investigation into whether FTX broke Texas securities laws.
Bankman-Fried is also set to be interviewed during The New York Times’ Dealbook Summit at 5PM ET on November 30th and will also appear as a guest during a Twitter Space meeting held by International Blockchain Consulting founder Mario Nawfal on December 1st.
Correction November 30th, 5:06PM ET: A previous version of the article incorrectly stated that Alameda Research is an exchange when it is actually a quantitative cryptocurrency trading firm. We regret the error.