A look at the stunning collapse of the FTX exchange.
I have been writing recently about the lack of institutional trust in cryptocurrency due to the recent failures of Three Arrows Capital and Terra. That was followed in the last two weeks with an even bigger scalp in the FTX exchange.
The popular exchange saw a “giant withdrawal surge” that resulted in bankruptcy proceedings and the loss of $15 billion in personal wealth for the now-former CEO, Sam Bankman-Fried.
So ‘What Happened’ at FTX?
The FTX founder Sam Bankman-Fried wrote a series of cryptic tweets after the collapse of his failed exchange, spelling out the words “What HAPPENED,” with the last word tweeted out a character at a time in a 24-hour period.
In the end, it appears that SBF’ empire was a castle of sand, and his inability to understand the fallout highlights the danger of crypto. A very young team of crypto enthusiasts ran the exchange with no real financial experience. A liquidator for the failed Enron energy company said that he had “never seen anything like this” in reference to the FTX books.
The crisis at FTX started when CoinDesk wrote an article about the balance sheet of Alameda Capital- a crypto hedge fund owned by SBF. The article said that the trading firm held billions of dollars worth of FTX’s native token FTT and had been using it as collateral for loans. That put the company at risk of a drop in the value of FTT and it was part of an interconnected web of shell companies and subsidiaries.
The crisis expanded Binance’s chief executive, Changpeng Zhao, tweeted that his company was selling all of its FTT holdings, worth about $500m, because of “recent revelations that have come to light”. There was a hint of revenge in the move after he noted that FTX had lobbied against his exchange in secret.
The value of FTT collapsed, leading to huge withdrawals as users of FTX rushed to drain $6bn from the exchange. Zhao then attempted to rescue FTX, with a joint letter of agreement, but that was dependent on due diligence. After looking at the books, Zhao said, “The issues are beyond our control or ability to help” and stepped away. That resulted in bankruptcy proceedings and a criminal probe in the Bahamas, where FTX was headquartered. We have now later learned that SBF had a $40m mansion on the island, dispelling his previous claims that he lived a frugal lifestyle.
In a November 8 tweet, Binance’s CEO said:
The contagion may not be over after FTX was said to have 1 million creditors. One of those seeing problems at the start of the week was Genesis Global Capital, a trading arm related to the Genesis Exchange and owned by the Digital Currency Group (DCG). Ironically, DCG owns Coindesk, which first broke the Alameda/FTX finance issues.
