The Fall Of FTX: Web3 Responds
FTX used to be one of the largest cryptocurrency exchanges until November 2022, when it filed for bankruptcy amid accusations of fraud and embezzlement. The company was known for flashy marketing campaigns, innovative ideas, and huge trade volumes. The criminal allegations were mostly directed at its CEO Sam Bankman-Fried, who founded the company in 2019. Bankman-Fried was arrested in the Bahamas and later extradited to the U.S. on eight criminal charges, including conspiracy to defraud investors (yikes). Let’s dive into the fall of FTX and how it affected the Web3 space.
What is FTX?
FTX was once a thriving cryptocurrency exchange that processed over $6 billion in spot trade volume at its peak, with an average daily trade volume of $2 billion. Talk about impressive! In January 2022, the company’s valuation skyrocketed to a whopping $32 billion, making it one of the most valuable crypto companies in the world.
But what made FTX stand out from the crowd? Well, for one thing, they had low trading fees. They charged a taker fee of 0.07% and a maker fee of just 0.02%, which is well below the industry average of 0.5%. No wonder they attracted both experienced and new traders alike.
FTX was also one of the first crypto exchanges to delve into tokenized stocks and had ambitious plans to expand in this area, even eyeing the acquisition of Robinhood, a commission-free trading app.
In 2021, FTX Group acquired several other trading platforms, including LedgerX, IEXGroup Inc, and Bitvo. And get this: they managed to do all of this with a skeleton staff model, employing only around 250 people. (For comparison, Coinbase has about 6,000 employees.)
But the meteoric rise of FTX was swallowed by the black hole of secrets its CEO was keeping.
What Caused The Fall Of FTX?
To fully understand where things went wrong, we need to be familiar with three main characters: Sam Bankman-Fried, the CEO of FTX at the time of its collapse; Changpeng Zhao, the CEO of rival exchange Binance; and former Alameda Research CEO, Caroline Ellison. Here are the key points:
- According to a complaint filed by the SEC, Sam Bankman-Fried used customer funds like his own personal piggy bank. He made private real estate investments and funneled money into political campaigns.
- In early November 2022, reports started circulating about Alameda Research, a crypto trading firm founded by Bankman-Fried, and its sketchy financial situation. Apparently, it had billions of dollars’ worth of FTT, FTX’s own token, as its largest asset. Yikes.
- To add fuel to the fire, Changpeng Zhao, the CEO of rival exchange Binance, announced on Twitter that he was planning to sell off Binance’s stockpile of FTT. That’s like the CEO of Coke going on TV and saying they’re planning to dump all their Pepsi stock. Not a good sign.
- As expected, FTT’s value started dropping. And it wasn’t just FTT. Other coins, including Bitcoin and Ethereum, took a hit too. In fact, Bitcoin hit a two-year low. Ouch.
FTX’s Damage Control
So, what did Bankman-Fried do? Let’s break it down…
- First he went on Twitter and admitted that FTX was facing liquidity issues, promising more transparency. But it was too little, too late.
- FTX.US put a temporary freeze on withdrawals, which seemed a bit sketchy given their earlier claims that they weren’t affected by liquidity issues.
- They eventually reopened withdrawals, but then things got even worse.
- The wallets of FTX and FTX.US were emptied in what looks like a hack job, and over $600 million was drained.
- FTX warned customers not to use their apps, claiming they had malware, while hackers allegedly tried to access bank accounts linked to FTX.US.
- The service that connects customer bank accounts with financial apps, Plaid, actually cut off FTX’s access to their products, but didn’t find any fraudulent activity.
- A deal to save the exchange fell through when Binance backed out due to reports of “mishandled customer funds” and “alleged US agency investigations”. Double yikes.
But wait, there’s more!
- FTX’s balance sheet, published on November 14th, showed $9 billion in liabilities and only $900 million in assets. That’s… not great.
- What followed was the subsequent Chapter 11 bankruptcy filing, followed by Bankman-Fried’s arrest on wire fraud charges. Basically, this is a way for businesses to restructure their debt and keep things running smoothly.
- But it seems like things took a turn for the worse after that. And get this: the new CEO has reported that FTX didn’t keep appropriate records or security controls with respect to its digital assets.
The Aftermath: A Brief Timeline
- On December 12th, 2022, Bankman-Fried was arrested in the Bahamas at the request of the US government.
- On December 13th, 2022, FTX’s new CEO, John J. Ray III, stepped in to testify instead of Bankman-Fried, telling lawmakers that FTX had “no record-keeping whatsoever.”
- On December 19th, 2022, former Alameda Research CEO, Caroline Ellison, and FTX cofounder, Gary Wang, pleaded guilty to charges related to defrauding FTX’s customers and investors.
- On January 3rd, 2023, Bankman-Fried pleaded not guilty to each of the charges against him in a New York courtroom. That means there could be a criminal trial in the future.
How The FTX Collapse Affected The Web3 Space
The ripple effects of FTX’s collapse didn’t stop at its customers. Other exchanges, including BlockFi, also filed for bankruptcy. It was like a Web3 domino effect.
FTX owes customers billions, and the exchange owes its top 50 creditors almost $3.1 billion combined. This includes almost $1.45 billion owed to just the top 10 creditors. The company has been in contact with several international financial regulators, according to CNN.
How Other Web3 Companies Responded To The Fall Of FTX
- Consensys’ head economist of decentralized protocols, Lex Sokolin, stated that crypto was a lot bigger than the FTX issue and more about innovating for the future.
- Coinbase CEO Brian Armstrong took a more direct approach as he condemned the actions of Sam Bankman-Fried. Less than a week after FTX filed for bankruptcy, Coinbase placed a full-page advertisement in the Wall Street Journal, titled “Trust Us.” This could be interpreted as a way to show customers that they were more deserving than FTX.
- Crypto.com CEO Kris Marszalek held an “AMA” (ask me anything) on YouTube to reassure users and other members of the Web3 space that his exchange was safe.
So, there you have it. The fall of FTX happened due to a lack of liquidity, mismanagement of funds, and some shady financial practices. It’s sure to become a classic cautionary tale for anyone in the crypto world.
Featured image by Maxim Hopman on Unsplash
