Crypto Global
The collapse of FTX
Nov 22, 2022
The collapse of cryptocurrency exchange FTX has rocked the crypto world. On November 6, the value of the FTX token started falling, losing more than 80% of its value in 72 hours.
This sent shockwaves through the cryptocurrency industry and the fall of FTX triggered the collapse of more than 100 affiliated companies and wiped out countless savings. So what went wrong?
Sam Bankman-Fried founded quantitative trading firm Alameda Research in 2017. Two years later, he launched FTX, an exchange platform for buying or selling cryptocurrencies. After founding FTX, the startup attracted large investments from Silicon Valley and Wall Street. In a short period of time, FTX has grown to become the fourth largest cryptocurrency exchange for derivatives trading and the second largest cryptocurrency exchange. FTX grew in popularity and became a key rival to Binance, the world's largest crypto exchange by volume. When digital asset prices plummeted earlier this year, Sam Bankman-Fried bailed out businesses and spent around $1 billion to do so. FTX used money from customers - at least $4 billion - to fund Alameda's risky bets. An important point is that these funds given to Alameda were not in dollars but in FTT. FTT is FTX's own centrally controlled and token created out of thin air.
On Nov. 2, CoinDesk released a report based on a leaked Alameda tally. According to the leaked data, Alameda claimed to have over $14.6 billion in assets at the end of June, but most of that was held in FTT. On Nov. 6, Binance decided to liquidate at least $580 million worth of all remaining financial transaction taxes on their books, prompting mass withdrawals from FTX clients. And at some point, when the customers wanted to get their money from the exchange, there was no more money. At the time, Binance was willing and interested in fully acquiring FTX to protect users and help cover the liquidity crisis. However, on November 9, Binance decided that they will not pursue the potential takeover of FTX.
Who is Sam Bankman Fried?
Sam Bankman Fried was born in 1992. His mother is Barbara Fried, a Stanford professor who also happens to be the co-founder of Mind the Gap — a Democratic political fundraising organization. Sam's father, Joseph Bankman, was a law professor and later helped his son Sam raise money for his company. Sam's brother, Gabe Bankman-Fried, is the founder and director of Guarding Against Pandemics, an organization that advocates public investment to prevent the next pandemic. Gabe was legislative correspondent for the US House of Representatives and an adviser to major political donors in the Democratic Party. Sam's aunt, Linda P. Fried, is an epidemiologist, currently Dean at Columbia University, and has strong ties to the WEF (World Economic Forum).
Sam Bankman-Fried has reportedly become the second largest donor to the Democrats, right after George Soros. There have been reports that FTX plans to spend over $1 billion on the Democratic Party in 2024. According to another CoinDesk report, the Ukrainian government launched a crypto fundraising partnership with FTX in March 2022. FTX converted donations into fiat money against a deposit at the National Bank of Ukraine. «Aid for Ukraine» was the official initiative raising funds from the crypto community in favor of Ukraine's military and humanitarian needs. Ultimately, FTX became one of the largest charitable foundations supporting the country's war effort. FTX has made a lot of money from donors because the way exchanges make money is through transactions. The story of FTX thus has strange but very real connections to American politics and the war in Ukraine.
What does the bankruptcy report say?
The new CEO of FTX is John J. Ray III and has already handled corporate failures like Enron and other big companies. In the filing, the new CEO notes that he has over 40 years of legal and restructuring experience and that he has never in his career faced such a complete failure of corporate controls and a complete lack of trustworthy financial information.
According to the Nov. 11 bankruptcy filing, FTX’s liability estimate would make it the largest crypto-related bankruptcy ever filed. The filing also details how FTX did not have an accounting department and instead outsourced that function. Furthermore, FTX didn't even have an "accurate list" of its own bank accounts, or even a full record of the people who worked for the company. FTX apparently used an unsecured group email account to manage the security keys for its digital assets. Assets listed in the document included $4.1 billion in loans made by Alameda to related parties, of which $3.3 billion went to both Bankman-Fried personally and an entity he controls.
It's important to remember that the crypto industry started with Bitcoin. Bitcoin was created with the importance of self-custody and transparency in mind. Once again it has been shown how important it is to take care of your own assets. Of course, this brings its own challenges.
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DECOM Switzerland AG had no FTT tokens in the portfolios and no other connections to FTX or Alameda Research.