WTF FTX?! The A to Z of FTX’s fiasco

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Another day, another crypto exchange implodes. 

FTX, a Bahamas-based cryptocurrency exchange, announced on Friday, November 11, that it has filed for Chapter 11 bankruptcy in the US. Founder and CEO Sam Bankman-Fried, once called ‘Crypto’s white knight’ and featured on front pages of business magazines across the world, stepped down from his position effective immediately. 

And it didn’t end there. 

On the same day, around $600M was mysteriously siphoned out of the collapsing crypto exchange, which company executives have referred to as a potential hacking incident.

Sam Bankman-Fried witnessed a massive fall after a bomb dropped by CoinDesk questioning the financial stability of Sam Bankman-Fried’s crypto empire – Alameda Research and FTX.

Let’s look at perhaps one of the most spectacular financial disasters of this decade – the FTX collapse.

Who is Sam Bankman-Fried?

Sam Bankman-Fried (30) was born to professors who teach at Stanford Law School. In 2010, Bankman-Fried joined the Massachusetts Institute of Technology (MIT), where he graduated with a major in Physics in 2014. After graduation, he worked at the trading firm Jane Street. 

With a few of his close friends from Jane Street and MIT, Sam Bankman-Fried started Alameda Research in 2017, a quantitative trading firm where he made billions in fortune by trading Bitcoin. After a year, he launched FTX, which went on to become one of the top three global exchanges.

He considers himself an altruist and pledged to give away all his money. 

Sam Bankman-Fried also established FTX Future Fund, funded primarily by him, with significant contributions from Caroline Ellison, Gary Wang, and Nishad Singh. 

The Future Fund came into existence to develop an early-detection system for unknown pathogens, as well as to design and manufacture personal protective equipment to make the lives of immunocompromised people easy.

FTX: What you need to know

Based out of California, FTX, a cryptocurrency exchange company, was founded by Sam Bankman-Fried and Gary Wang in 2018. The crypto exchange offers derivatives, options and volatility products, tokenised stocks, prediction markets, leveraged tokens, and an OTC desk.

Since its launch in May 2019, FTX has witnessed tremendous growth. The company’s revenues increased over tenfold this year and 75x since its Series A funding round closed in mid-2020.

Earlier this year, FTX was valued at a massive $32B.

Binance’s investment

Binance, the world’s leading cryptocurrency exchange and blockchain ecosystem, made a strategic investment in FTX in equity and FTX Token (FTT) to help enable the sustainable growth of the FTX ecosystem. However, the company sold its share last year and received $2.1B in Binance’s stablecoin (BUSD) and FTT tokens as part of the deal.

Truth Bomb

The collapse of FTX began when CoinDesk, a news site specialising in bitcoin and digital currencies, revealed that FTX’s corporate sibling, Alameda Research, which had $14B in assets, was too heavily reliant on illiquid tokens, including FTX’s own FTT. Both FTX and Alameda were founded and are largely owned by Bankman-Fried.

Soon after the report, Binance CEO Changpeng Zhao set off alarm bells among investors when he tweeted, “Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books.”

The news prompted retail investors and traders to sell off the FTT, tanking the price and resulting in a liquidity crunch. Soon after, Sam Bankman-Fried approached Zhao to help them bail out of the chaos

However, within 24 hours, Binance backed out of the proposed acquisition of its rival FTX due to mishandled customer funds and alleged US agency investigations.

Here’s how Sam Bankman-Fried reacted

FTX CEO Sam Bankman-Fried informed his employees about exploring other options for his firm after a deal with Binance collapsed.

In a message to FTX employees, Bankman-Fried says, “I’m working, as quickly as I can, on the next steps here. I wish I could give you all more clarity than I can.” 

“I’ll keep fighting for those (goals), as best as I can, as long as it’s correct for me too. I’m exploring all the options,” he adds. “I’m deeply sorry that we got into this place and for my role in it,” he wrote. “That’s on me, and me alone, and it sucks, and I’m sorry, not that it makes it any better.”

Sam Bankman-Fried also sought investors for emergency funds to cover up to $8B due to withdrawal requests, The Wall Street Journal reported on Wednesday. However, he did not succeed.

Filed for bankruptcy

On November 11, FTX filed bankruptcy protection for FTX.com, FTX US, Bankman-Fried’s proprietary trading firm Alameda Research, and approximately 130 additional affiliated companies. 

In another tweet, Friedman-Bank says, “I’m really sorry, again, that we ended up here. Hopefully things can find a way to recover. Hopefully this can bring some amount of transparency, trust, and governance to them. Ultimately hopefully it can be better for customers.”

He adds, “This doesn’t necessarily have to mean the end for the companies or their ability to provide value and funds to their customers chiefly, and can be consistent with other routes. Ultimately I’m optimistic that Mr. Ray and others can help provide whatever is best.”

Parallely, Bankman-Fried was replaced as Chief Executive Officer by John Ray III. 

Mr. Ray, the newly appointed CEO, states, “The immediate relief of Chapter 11 is appropriate to provide the FTX Group the opportunity to assess its situation and develop a process to maximise recoveries for stakeholders. The FTX Group has valuable assets that can only be effectively administered in an organised, joint process. I want to ensure every employee, customer, creditor, contract party, stockholder, investor, governmental authority, and other stakeholders that we will conduct this effort with diligence, thoroughness, and transparency. Stakeholders should understand that events have been fast-moving and the new team is engaged only recently. Stakeholders should review the materials filed on the docket of the proceedings over the coming days for more information.”

Mysterious transaction, an inside job?

Later that evening, more than $600M was siphoned from FTX’s crypto wallets, reports CoinDesk. However, on its official Telegram page, the company reported that it had been compromised, instructing users not to install/delete FTX apps. 

“FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don’t go on FTX site as it might download Trojans,” wrote an account administrator in the FTX Support Telegram chat” FTX General Counsel Ryne Miller pinned the message.

Soon after, Ryne Miller tweeted, “Following the Chapter 11 bankruptcy filings – FTX US and FTX [dot] com initiated precautionary steps to move all digital assets to cold storage. Process was expedited this evening – to mitigate damage upon observing unauthorised transactions.”

https://twitter.com/_Ryne_Miller/status/1591326796305530880?s=20&t=VkKMtL7fcyndJghLgvfvBQ

FTX wallet holders are currently observing $0 balances across their FTX.co and FTX US wallets.  

Further, the crypto community suspects the outflows are caused by someone in FTX founder Sam Bankman-Fried’s inner circle, reports CoinDesk. 

However, ZackXBT, a Twitter sleuth, says, “Multiple former FTX employees confirmed to me they do not recognise these transfers for ~$383M.”

This is just the latest in a long line of exchanges that have collapsed under the weight of their own leveraging. It’s a reminder that, despite all the hype, crypto is still a very young and volatile market.

This is a developing story and more information will be added as it becomes available.

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