Katana VentraIP

Bankruptcy of FTX

The bankruptcy of FTX, a Bahamas-based cryptocurrency exchange, began in November 2022. The collapse of FTX, caused by a spike in customer withdrawals that exposed an $8 billion hole in FTX’s accounts,[1] served as the impetus for its bankruptcy. Prior to its collapse, FTX was the third-largest cryptocurrency exchange by volume and had over one million users.

On 2 November 2022, CoinDesk published an article stating that Alameda Research, a trading firm affiliated with FTX and owned by FTX chief executive Sam Bankman-Fried, held a significant amount of FTX's exchange token, FTT.[2][3] The article triggered a spike in withdrawals from FTX, but eventually, customers became unable to retrieve the money they had deposited in the exchange.[4] On 11 November, FTX, Alameda Research, and over 100 affiliated entities filed for bankruptcy. Bankman-Fried resigned as FTX CEO and was replaced by John J. Ray III.[5][6]


The collapse of FTX has had a wide impact on cryptocurrency markets, with comparisons made to the Enron scandal and Madoff investment scandal, and was described by federal prosecutors as "one of the biggest financial frauds in American history".[7][8] Following the bankruptcy, the Securities Commission of the Bahamas froze the assets of one of FTX's subsidiaries.[9] Bankman-Fried's net worth, estimated at $16 billion prior to the collapse, was reported as having been wiped out,[10] and several institutional investors of FTX wrote off their investment stakes in the company.[11][12] Some $473 million in funds were later taken from FTX in an "unauthorized transaction".[13] The collapse of FTX has resulted in a ripple effect across cryptocurrency markets, with the price of Bitcoin falling to its lowest level in two years.[14]


In late 2022 and early 2023, key executives from FTX and Alameda, such as Caroline Ellison, Gary Wang, and Nishad Singh, pleaded guilty to defrauding FTX customers and related charges.[15] In October 2023, all three testified that it was Bankman-Fried who directed them to commit fraud.[16] On 2 November 2023, Sam Bankman-Fried was convicted of defrauding customers of FTX and lenders of Alameda Research.[17]

Denominations

FTT

"FTT Whitepaper". Archived from the original on 9 November 2022.

5 May 2019 (2019-05-05)

134,454,978.27 FTT (est. August 2022)

Timeline[edit]

CoinDesk article[edit]

Following months of arguments and disagreements between Changpeng Zhao, the CEO of Binance, and Bankman-Fried, tensions between the two had intensified days before the crisis.[30] Zhao's firm Binance had obtained $2.1 billion in Binance USD and FTT coins in 2021, following a deal in which FTX bought back an equity stake held by Binance in FTX, and in early November 2022, it had 23 million FTT tokens, worth about $529 million at the time.[31]

Binance divestment and proposed acquisition[edit]

On 7 November 2022, Zhao announced that Binance had intended to sell its holdings in FTT.[32][31] The sale of Binance's holdings in FTT, compounded with the low trading volume of FTT and the enmity between Zhao and Bankman-Fried, resulted in the price of the token plummeting.[33][34][35] Binance had received FTT from FTX in 2021 during a transaction in which FTX bought back Binance's equity stake in FTX.[36] Zhao cited "recent revelations that came to light" as the motivation for selling FTT.[36] Bloomberg and TechCrunch reported that any sale by Binance would likely have an outsized impact on FTT's price, given the token's low trading volume.[37][38] The announcement by Zhao of the pending sale and disputes between Zhao and Bankman-Fried on Twitter led to a decline in the price of FTT and other cryptocurrencies,[39] resulting in $6 billion of customer withdrawals from FTX.[40] FTX became unable to meet the demand for further withdrawals, and on 8 November, Bankman-Fried and Zhao jointly announced Binance had entered into a nonbinding agreement to purchase FTX to ensure that customers could recover their assets in a timely manner.[41][42] The deal did not include the sale of FTX.US.[41] Zhao announced on Twitter that the company would complete due diligence soon, adding that all crypto exchanges should avoid using tokens as collateral.[43][44] He also wrote that he expected FTT to be "highly volatile in the coming days as things develop". On the day of that announcement, FTT lost 80 percent of its value.[45]

Investigations[edit]

Lawsuits and legal involvement[edit]

Following the collapse of FTX, the Royal Bahamas Police Force launched a criminal investigation into the company.[107][27]


Anonymous sources cited by Bloomberg said that the office of the United States Attorney for the Southern District of New York had begun an investigation into FTX's collapse as of 14 November.[28]


The United States House Committee on Financial Services plans to conduct hearings in December on the collapse of FTX, and committee leaders said they would seek testimony from Bankman-Fried.[108]


On 15 November 2022, a class-action lawsuit was filed in Miami against Bankman-Fried and several celebrities, including American football quarterback Tom Brady and comedian Larry David, alleging the company engaged in deceptive practices; they are seeking damages.[109] The lawsuit also named Gisele Bündchen, Steph Curry, Shaquille O'Neal, Udonis Haslem, David Ortiz, Trevor Lawrence, Shohei Ohtani, Naomi Osaka, and Kevin O'Leary.[110]


On 21 December 2022, both Caroline Ellison (former CEO of Alameda) and Gary Wang (former Chief Technology Officer of FTX) pled guilty to fraud and other charges and were cooperating with federal investigators in criminal case against Sam Bankman-Fried. In the signed agreements Ellison and Wang agreed to "cooperate fully" and "truthfully and completely disclose all information concerning all matters".[111] On 3 January 2023, Bankman-Fried pled not guilty to fraud and other charges. His trial began in October 2023.[112] On 2 November 2023, Bankman-Fried was found guilty of all charges.[17]

Impact[edit]

Effects on other firms[edit]

On 16 November 2022, the cryptocurrency brokerage service Genesis suspended withdrawals following FTX declaring bankruptcy, further affecting the industry. The cryptocurrency exchange company Gemini, owned by Cameron and Tyler Winklevoss, announced that it would be pausing withdrawals on its Earn program, which uses Genesis as a lending partner.[113]


The exchange token of Crypto.com, Cronos, lost approximately $1 billion in value in November.[114] On 14 November, Crypto.com's CEO assured users that the exchange was functioning as normal.[114] Commenters and customers remained fearful that Crypto.com could experience a collapse similar to FTX.[115]