In what is being dubbed as The Lehman Brothers moment for the Crypto world the collapse of FTX and that of its founder Sam Bankman Fried referred to by his initials SBF was a disaster in the making and has taken the crypto world by storm. The suddenness of the event and the financial ruin of the company has brought the former billionaire crypto trader and founder to a net worth of potentially zero, the company itself FTX has filed for bankruptcy and is up for criminal investigations by the US Department of Justice. Many things are still being uncovered by the investigative authorities after the company filed for bankruptcy on 11th of November. Major questions still have been raised in the highly volatile and speculative business of cryptocurrency, a covert and an often unregulated synthesis. The future for the crypto market though has not been destroyed albeit has taken a major hit and a financial meltdown in the future of this business seems likely. Investors insecurity and trust issues between founders and the investors has been potentially ignited. Sensitive information regarding the case has been widely reported by the major newspapers who are still observing the events with a keen eye. The extent of the problem and the role of its founder are being probed and it seems that this disaster had wholly been the folly of SBF who held over the reins of various subsidiary and network companies where millions of dollars of money was being transferred in an unregulated manner to the other. More information on this has been provided here.
About the company FTX
FTX is a Bahamas based Cryptocurrency Exchange, Founded in the year 2019 by Sam Bankman Fried and Gary Wang and Indian origin Nishad Singh counted as co-founders. Before its collapse it was the 3rd largest crypto platform by volume. The net income in the year 2021 was approximately US $388 million. Various deals and acquisitions were constantly being made by FTX on behalf and in disguise of its affiliates and had important links to the story of the collapse. For example FTX acquired Blockfolio, a crypto portfolio tracking app in Aug 2020 for $150 million. In July of 2021 it reportedly raised $900 million at a valuation and then again a $400 million in Series C funding the same year. During the same time it moved its headquarters from Hong Kong to the Bahamas. Important points now begin to emerge.
How the Story Unfolded
Binance, a rival crypto network reportedly bought a 20% stake in FTX just after 6 months the firm started. The next part of the story now involves several companies and a public feud ending in the collapse. Alameda Research was a quantitative crypto trading firm, with the same man SBF as its founder FTT whereas is the native cryptocurrency token of FTX the understanding of which is necessary in the story’s development. In November of 2022, Binance CEO Changpeng Zhao stated that his firm intended to sell its holdings of FTT, (20%) stake of FTX’s token. A report published in CoinDesk on 2nd of November was cited as the starting point of the crisis though numerous links between Alameda Research and FTX had started appearing in the press in as early as September of this year mostly in Bloomberg amidst other sources. The report stated that the bulk of the holdings of Alameda Research SBF’s QT firm were held in FTT, the native token. Possibly any sale by Binance would have an outsized impact on FTT’s price due to the token’s low trading volume. The pending sales and disputes between Zhao and Bankman Fried on Twitter led to a severe decline. Zhao to assuage his decision said that he had entered into a non-binding agreement to purchase due to a liquidity crisis at FTX also adding that he believed FTT to be highly volatile. On the day of the announcement FTT lost 80% of its value. This signaled the end, unfortunately or fortunately the covert tricks would now be laid bare. In the investigations that followed a mishandling of customer funds to the tune of a whopping $10 billion was reported. Furthermore, Bankman Fried had transferred at least $4 billion from FTX to Alameda Research without any disclosure, the money transferred was only backed by FTT and shares in the company Robinhood. It also came to light that FTX owned $16 billion in customer assets. After this on 11th of November FTX declared bankruptcy and judicial proceedings are underway in the state of Delaware and new findings shock and disappoint the public still more often.
Role of the Founder and Allegations against the Company- Having been fallen from grace in the most unexpected and abrupt ways Sam Bankman Fried is currently being charged and prosecuted both by the Bahamian Police and the US courts diligently.An investor, entrepreneur and founder Bankman Fried is the former CEO of FTX, FTX.US, and quantitative trading firm Alameda Research and a billionaire person gone bankrupt with an official net worth of zero dollars, a financial downfall we’ve seen as no other. A specialist sniffing at the details said that FTX was a chaotic web of more than 100 different companies with a mind-boggling complexity. Speaking of the complexity and lack of any sense of orderliness Ray, a bankruptcy specialist noted that “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” The interlinkages and money transfers to companies privately held by SBF made this all the more suspicious and prone to accusations from the very beginning if we are to watch closely. The FDIC (Federal Deposit Insurance Corporation) in a close and desist letter accused the FTX of making false and misleading representations. Also FTX was under investigations in Texas for allegedly selling unregistered securities. It were things like these that made the company a covert operation and a very complex one and lastly those accusations have been proven. Another major accusation is that FTX or basically SBF was involved in effectively dodging the legal and regulatory frameworks by actively acquiring stakes in comapnies that already had licenses from authorities, shortcutting the often drawn out approval process. In a way authorities and other legal entities were taken for a ride where they were openly fooled and misguided by the top brass of FTX. A major instance was the one in which by acquiring a 10% stake in the IEX Group, the US stock trading platform it made numerous acquisitions on behalf of it, it could not have made those purchases if it had done so by itself. Regulatory ‘moats’ were harbored by the company policies and moreso it also created barriers for rivals that would eventually give it the sole access to lucrative new markets and partnerships. Allegations are inexhaustible here.
Future of Crypto after ths debacle- Spillover effects and shockwaves as expected have been observed, BlockFi, a cryptolender rescued by FTX formerly paused customer withdrawals. On Wednesday, Crypto exchange Genesis, made a decision, to temporarily suspend redemptions from the company’s lending business. Crytomarket watchers expect more instability and insecurity though the core Crypto asset, Bitcoin, has held up the week by staying broad flat at $16,700. This year though has not at all been good for the Crypto market where it has fallen from a market cap of $3 trillion to $1 trillion now.
A very precarious times for all the crypto Investors and the enthusiasts, this is surely not the end though a major jolt. Maybe a wakeup call for tidying up the business and zooming in on its infirmities and loopholes. Regulations and policies by the Companies and Government seem imminent ,because it is people’s money that is at the stake. A slow and resurgent plan for now seems the only potential answer.