FTX Scam – The Beginning of Something Great

In 2018, MIT graduate and former Jane Street Capital International exchange-traded funds trader Sam Bankman-Fried founded the FTX Exchange. Bankman-Fried wanted to have an exchange that was easy to use on both desktop and mobile trading apps and would bring in both beginners and seasoned crypto investors. Its key trading products included derivatives, options, volatility products, and leveraged tokens. According to Investopedia, it also provided spot markets in over 300 cryptocurrency trading pairs. CoinMarketCap said at the height of its success, FTX had $840 million worth of crypto assets trading daily on its platform.

FTX continued to rise in fame with splashy Super Bowl ads, celebrity shareholders, naming rights to the former American Airlines Arena in Miami, annual revenue of $1 billion, being the “crypto savior” for many cryptocurrencies that needed a helping hand, donating to philanthropic organizations, and attracting many blue-chip investors looking to cash in on FTX’s rise to fame.

Yet, with this meteoric rise and the accolades FTX received, those keeping up with the balance sheet were not doing a good job of balancing. FTX was losing billions of client funds, transferring client investments to fund other investments, and overestimating the liquidity available for clients should they want to withdraw their money.

History of FTX

FTX seemed to be a rising star in the crypto-exchange market. Regulated by the Securities Commission of the Bahamas (SCB), FTX boasted security risk management features in personal accounts, exchanges, and other security areas. Holding FTX’s native token allowed for holders to receive huge discount on fees and the more a person traded, the fees to trade were lowered. The idea was brilliant.

To add icing on the cake, FTX secured sponsorships and partnerships that were impressive. In August of 2020, FTX acquired the mobile portfolio tracking application, Blockfolio for $150 million. In July of 2021, FTX secured a $900 million funding, which valued FTX at $18 billion. In September of 2021, FTX signed a sponsorship deals with Mercedes Formula 1 team, Shark Tank venture capitalist Kevin O’Leary, and Golden State Warriors point guard Stephen Curry, and in October of that same year, FTX received investments from Singapore;s Temasek and Tiger Global, which put the company at a $25 billion valuation. In 2022, it raised more capital, signed a sponsorship deal for the naming rights of Miami Heat’s home court, signed a deal to buy crypto lender BlockFi, and per FTX’s website, the company, “is proud to partner with the world’s most exciting teams, properties, and heroes of their trade to amplify crypto education, involvement, and community impact. FTX even attracted the attention of Binance CEO Changpeng Zhao.

Yet there was more going on behind closed doors than anyone could have imagined.

What Happened to FTX

Despite all the great moves FTX seemed to make in the public eye, behind closed doors, those who were managing FTX were not handling the business as it should have been. According to livemint.com, on August 19, 2022, a U.S. bank regulator ordered FTX to halt “false and misleading” claims it had made about whether the funds at the company were insured by the government. November 2, 2022, Coindesk reported Alameda Research, Bankman-Fried’s crypto trading firm, heavily depended on FTX’s native token, FTT. It was this report that triggered Zhao of Binance to sell its holdings of the token, which triggered a sell-off by investors, collapsing the value of the token. This left FTX in a liquidity crisis, in which depositors could not withdraw their funds. Binance thought about acquiring FTX, and even signed a letter of intent, but quickly changed its mind once it studied the balance sheets and saw the incoming legal woes, and that was when FTX filed for Chapter 11 bankruptcy. [1]

As if bankruptcy was not enough, the SCB teamed up with the Financial Crimes Investigation Branch to investigate FTX’s alleged misconduct. The Wall Street Journal reported that the Securities and Exchange Commission and the Department of Justice was also launching its own investigations into the management of FTX.

As the days and weeks pass, the outlook for FTX and its founder were looking quite grim and this had a ripple effect that would be felt across multiple areas of the crypto market.

What are the effects of the FTX meltdown

According to the Washington Post, the sudden collapse of FTX is being referred to “as the crypto industry’s “Lehman Brothers” moment” which refers to the implosion of the investment bank that helped spark the 2008 financial crisis. As FTX filed bankruptcy to protect its assets and work on a plan to try to pay creditors and investors, the ripple effect of its filing could be felt by many. Here are a few of the effects that affected the entire crypto market:

1. According to FXStreet.com, BlockFi, had just received a $250 million credit line with FTX. With FTX’s liquidity wiped out, BlockFi is prepared to file for bankruptcy and halted all client withdrawals and paused deposits to wallets and interest accounts.

2. On November 2, 2022, CoinDesk said they were able to access the balance sheet of Alameda Research, which had a massive amount of FTX’s native token FTT and most of its other holdings were illiquid assets. This meant there was not enough money to cash out if there was a need to.

3. The bankruptcy announcement happened prior to the stock market opening, so it knocked the entire stock market out of whack.

4. Bitcoin and Ethereum, both of which can be attributed to most other crypto’s price points, fell significantly. Bitcoin’s price shed over 20%, and Ethereum lost 16% of its value.

5. Celebrities who invested into, and have used their fame to help FTX, have filed a class action lawsuit claiming deceptive practices and alleging FTX yield bearing accounts were unregistered securities unlawfully sold in the US.

6. $46.5 million USDT owned by FTX frozen (on the Tron blockchain in a wallet belonging to FTX) by Tether at request of law enforcement. Due to this, Tether, once pegged 1-to-1 with the dollar, has lost its 1-to-1 peg. [2]

7. Most of FTX’s legal and compliance staff abandoned ship on Tuesday, which is concerning considering there are now investigations looming by the US Securities and Exchange Commission, Commodity Futures Trading Commission, SBC, and the Department of Justice. [3]

8. Amid all of this, investors have become weary of exchanges. To alleviate concerns, emails started going out from various exchanges trying to alleviate any concerns that they too can befall this same demise. One example was Sequoia Capital, who posted a letter on Twitter [4] and on their website that said, “Sequoia Capital’s exposure to FTX is limited…The $150M loss is offset by -$7.5B in realized and unrealized gains in the same fund (Global Growth Fund III – that FTX is a part of)…We are in the business of taking risk…At the time of our investment in FTX, we ran a rigorous diligence process…In 2021, FTX generated approximately $1B in revenue and more than $250M in operating income…” There are many others, but clearly, various exchanges wanted to try to do damage control to alleviate any concerns and fears of investors.

9. CBS News reported the value of NFTs slumped due to the crash. Since the FTX crash pushed down the price of some cryptocurrencies, this also shrunk the buying power that was once enjoyed by NFT collectors. As an example, a “Bored Ape Yacht Club” NFT Justin Bieber bought for $1.3 million in January, is now only worth $70,000.

10. With this crash, regulation will certainly be discussed in the upper levels of the political arena. White House press secretary, Karine Jean-Pierre said, the FTX developments highlighted “why prudent regulation of cryptocurrencies is indeed needed. The White House, along with the relevant agencies, will again closely monitor the situation as it develops.” [5]

There are many more instances, but the main sticking point is FTX’s demise has all crypto in disarray and distrust. Will trust ever come back to the market?

Will Cryptocurrency make a comeback?

Cryptocurrency was already in a “crypto winter.” The market has continued to roller coaster throughout the last several months and, despite signs of hope earlier in the month, that hope has somewhat fizzled with this meltdown. Last November, the entire crypto market had an astounding valuation of $3 trillion. The market now hovers around $800 billion. Investors, already weary of a bearish market, are not quickly jumping into crypto assets for their investments and, to add to the stew pot, Steven Maijoor, chair of the Financial Stability Board (FSB), an international body that monitors and recommends standards for the global financial system has said that with the continual growth of crypto markets that have structural vulnerabilities and incomplete regulations and supervision will “soon reach a point where they represent a threat to the stability of the global financial system.” [6]

Despite law professor at Vanderbilt University Yesha Yadav calling this situation, “close to apocalypse” for cryptocurrency, those who have weathered the storms over the past few years know that there are major ups and downs in the crypto sphere. A look at Bitcoin will give you a little example. In June of 2011, Bitcoin soared from $2 to more than $32. On June 19, 2011, when Mt. Gox, then the largest Bitcoin exchange, admitted that criminals had stole millions of dollars’ worth of Bitcoin, the value fell to one penny. In 2018, Bitcoin skyrocketed to a record $19,000 per Bitcoin then fell to less than $4,000. Bloomberg called this 2018 crash the “Great Crypto Crash” which they claimed was worse than the dot-com crash. When Covid hit, Bitcoin fell from over $10,000 to $4,000 each. Yet, Bitcoin bounced back to an all time high of $68,990 in November 2021.

Clearly crypto has continued to be resilient. Horrific news comes and we watch the market wipe billions from the books. Once the storm passes, prosperous times return, and new all-time highs are achieved. This storm may last a little longer than the rest of the storms, but as the time passes, crypto will make a comeback and will comeback with a vengeance. Around the globe, cryptocurrency continues to be widely adopted. CoinDesk reported that payment giant Visa, Mastercard, and American Express filed trademark applications related to digital wallets, NFTs and the metaverse. Many people may be wary of exchanges, which is why they are choosing to keep them in their ledger wallet. However, with a market valuation of $800 billion, this is still a sizeable market that shows people still have faith in this asset class.

It is hard to predict the future, but as general adoption continues, digital assets become a normal part of life, and regulators create sensible protections and guidance for crypto, prices should appreciate in the long run. Crypto will always be volatile, which is why, no matter what you decide to invest in, always do your own research and never risk more than you are willing to lose. That way, when times are prosperous, you can responsibly take profits. When times are not as prosperous, you can weather the storm, no matter how grim it may get.

1. (8) Binance on Twitter: “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.” / Twitter

2. $46.5 Million USDT Owned by FTX Frozen by Tether at Request of Law Enforcement (cryptonews.com)

3. Most of FTX Legal Team Depart as Exchange Collapses (cryptonews.com)

4. https://twitter.com/sequoia/status/1590522718650499073/photo/1

5. https://www.theguardian.com/technology/2022/nov/10/ftx-cryptocurrency-collapse-investigation

6. Crypto will soon threaten global financial stability, FSB official says (fxstreet.com)

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