Bankruptcy of FTX

• 1. Introduction

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  On the 2nd of November 2022, FTX ranked as the third-largest cryptocurrency exchange on earth by trading volume. It had over one million users and a founder, Sam Bankman-Fried, whose net worth was estimated at $16 billion. Nine days later, federal prosecutors would describe what had unfolded as "one of the biggest financial frauds in American history." The questions that followed were urgent. How does an exchange handling billions of dollars collapse in little more than a week? What was the relationship between FTX and its affiliated trading firm? And when one of the biggest names in a new asset class implodes, who else goes down with it?

• 2. Double Company, One Boss

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  Sam Bankman-Fried cofounded Alameda Research, a cryptocurrency trading firm, in 2017. Two years later, he launched FTX to generate revenue that would fund Alameda's trading activities. For a time, he ran both companies simultaneously. In October 2021, he formally stepped back from Alameda, naming Caroline Ellison and Sam Trabucco as co-CEOs. Ellison was reported to have a romantic involvement with Bankman-Fried. As of August 2021, he still held 90% of Alameda's ownership.

  Alameda was once the single largest trader on FTX, a relationship that went far deeper than shared leadership. Between the 1st of June and the 22nd of July 2022, Alameda's known wallets were the largest stablecoin depositors on the exchange. They represented 10% of all Tether transfers and 30% of all USD Coin transfers on FTX during that stretch. John J. Ray III, who later oversaw FTX's restructuring, revealed that Alameda held a "secret exemption" from FTX's automatic liquidation rules. That allowed Alameda to hold losing positions that would have been force-closed for any other trader.

  Alameda suffered heavy losses in May and June 2022. Anonymous sources later told the Wall Street Journal that FTX responded by lending the trading firm more than half of its customer deposits. FTX's own terms of service explicitly prohibited this. Bankman-Fried, according to those same sources, called the decision a "poor judgment call." FTX used software to conceal the misuse of customer funds.

• 3. The Article That Broke Everything

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  Ian Allison of CoinDesk published a report on the 2nd of November 2022. It revealed that 40% of Alameda Research's $14.6 billion in assets consisted of FTT, FTX's own exchange token. FTT was Alameda's single largest unlocked asset and also its third-largest form of collateral. The article immediately set off a rush of customer withdrawals from FTX.

  Changpeng Zhao, CEO of rival exchange Binance, had been in an escalating dispute with Bankman-Fried for months. Binance held about 23 million FTT tokens in early November 2022, worth roughly $529 million. On the 7th of November, Zhao announced publicly that Binance intended to sell its entire FTT position. Ellison offered to buy Binance's FTT holdings at $22 per token. Observers speculated that Alameda held loans that would be liquidated if FTT's price fell below that level. The offer did not slow the sell-off.

  $6 billion in customer withdrawals followed within a day of Zhao's announcement. FTX could not meet the demand. On the 8th of November, Bankman-Fried and Zhao jointly announced that Binance had signed a nonbinding agreement to purchase FTX. The stated goal was to allow customers to recover their assets in a timely manner. On that same day, FTT lost 80% of its value.

• 4. Nine Days to Bankruptcy

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  By the 9th of November, Bloomberg was calling a Binance acquisition of FTX "unlikely." The United States Securities and Exchange Commission and the Commodity Futures Trading Commission had both opened investigations into FTX's handling of client funds. The Wall Street Journal reported that same day that Binance would not move forward with the deal. Binance cited FTX's reported mishandling of customer funds and the pending investigations as its reasons.

  FTX's website stated on the 9th of November that it was not processing withdrawals. Bankman-Fried acknowledged the firm needed outside capital to meet demand, even while insisting FTX's assets exceeded its customers' deposits. He told reporters that FTX.US, the American arm, was "not currently impacted" by the crisis. FTX approached Kraken for a potential rescue deal on the 10th of November. Bankman-Fried said the firm was seeking $10 billion in emergency financing to remain solvent.

  Ryne Miller, a member of FTX US's legal team, believed there was a "0%" chance of securing further investment. He and other executives urged Bankman-Fried to cede control of FTX US, which he resisted. The in-house legal and compliance teams had largely resigned by the 10th of November. Employees began attempting to sell company assets, among them stock-clearing firm Embed Financial Technologies and the naming rights to FTX Arena.

  On the 11th of November, FTX, FTX US, Alameda Research, and more than 100 affiliates filed for bankruptcy in Delaware. Bankman-Fried stepped down as CEO and was replaced by John J. Ray III. Ray was a restructuring specialist who had previously overseen the liquidation of Enron. Bankman-Fried told Reuters on the 12th of November that he was still in the Bahamas. The Royal Bahamas Police Force questioned him that same day.

• 5. Missing Funds

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  Late on the 11th of November, $473 million in funds vanished from FTX through what Ryne Miller described as "unauthorized transactions." Miller announced that any remaining cryptocurrency holdings would be moved to offline "cold storage." The funds taken were mostly stablecoins, including Tether. Whoever took them quickly converted the stablecoins into Ether, a method cryptocurrency thieves use to thwart recovery efforts.

  The Financial Times reported that FTX's balance sheet, in the days before bankruptcy, showed $9 billion in liabilities against just $900 million in liquid assets. The exchange also held $5 billion in "less liquid" assets and $3.2 billion in illiquid private equity investments. American columnist Matt Levine noted that some of FTX's "less liquid" assets included tokens the exchange had "just made up." These were the FTX Token and Serum, a separate cryptocurrency that FTX had created and placed on its own balance sheet.

  Between $1 billion and $2 billion in customer funds reportedly could not be accounted for as of the 12th of November. Kraken's chief security officer said on the 14th of November that his firm knew "the identity" of a user who had paid transaction fees tied to moving the stolen money through a Kraken account. Bankman-Fried, in an interview published on the 16th of November by Vox, blamed the theft on an "ex-employee" or on malware residing on a former employee's device.

  In January 2024, the Department of Justice indicted three individuals for running a SIM swap scam operation. The operation allegedly stole "over $400 million in virtual currency" from an unnamed company on the 11th and the 12th of November 2022. Sources told Bloomberg that the unnamed company was FTX.

• 6. Contagion

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  Bitcoin fell to its lowest price in two years as news of FTX's collapse spread through early November 2022. Tether, a stablecoin designed to hold steady at $1.00, slipped to $0.97. Solana, a cryptocurrency associated with Bankman-Fried, also declined. Share prices for publicly traded cryptocurrency companies fell broadly.

  Crypto.com's exchange token, Cronos, lost approximately $1 billion in value during November. Fears spread that Crypto.com itself could face a collapse similar to FTX's. CEO Kris Marszalek publicly assured users that his firm was liquid. He said Crypto.com did not use Cronos the way FTX had used FTT.

  BlockFi, a cryptocurrency lender, disclosed "significant exposure" to FTX on the 14th of November and filed for Chapter 11 bankruptcy on the 28th of November. Genesis, a subsidiary of Digital Currency Group, halted withdrawals on the 16th of November. That halt cut off Gemini, an exchange owned by the Winklevoss twins. Gemini could no longer allow redemptions through a service it ran in partnership with Genesis. Grayscale Bitcoin Trust, another Digital Currency Group product, was trading at a 42% discount to the value of its Bitcoin holdings as of the 14th of November.

  Silvergate Bank announced on the 9th of March 2023 that it would wind down and liquidate, having sustained heavy losses connected to FTX. Three days later, on the 12th of March 2023, Signature Bank was shut down by the New York State Department of Financial Services after regulators designated it a systemic risk. Following the earlier collapse of Silicon Valley Bank, Signature Bank's failure became the third-largest bank failure in United States history.

• 7. Investors and Promoters

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  Sequoia Capital wrote its entire FTX stake down to zero on the 9th of November, disclosing a loss of some $214 million. The firm published a notice to investors, including on Twitter, assuring them the stake represented a small fraction of its overall portfolio. Sequoia replaced a profile of Bankman-Fried on its website with a link to that same notice. Ontario Teachers' Pension Plan issued a similar statement. Tiger Global Management, SoftBank Group, BlackRock, Lightspeed Venture Partners, and Temasek also stood to write off their investments in FTX.

  Tom Brady and Gisele Bündchen were among the public figures who had received compensation for promoting FTX. Shaquille O'Neal, Stephen Curry, and Kevin O'Leary were also listed among investors or paid promoters of the exchange. A class-action lawsuit filed in Miami on the 15th of November 2022 named Bankman-Fried alongside Brady, Larry David, and others. Plaintiffs alleged deceptive practices and sought damages.

  Jim Chanos predicted the collapse would drive increased scrutiny and regulation of the entire cryptocurrency sector. He also characterized crypto broadly as "designed to extract fees from really unsuspecting investors." Richard Handler, CEO of Jefferies Group, said on the 10th of November that he had twice tried to meet with Bankman-Fried. The attempts had come in July and September of 2022. Handler said he had perceived Bankman-Fried as "in over his head." Bankman-Fried had not responded to emails sent on Handler's behalf.

  Lawrence Summers compared the collapse to both the Lehman Brothers bankruptcy and the Enron scandal. Writers at publications including the New York Times and the Financial Times called the episode "crypto's Lehman moment."

• 8. Conviction and Recovery

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  Caroline Ellison pleaded guilty to fraud and related charges on the 21st of December 2022. Gary Wang, FTX's former chief technology officer, pleaded guilty the same day. In their signed cooperation agreements, each committed to "cooperate fully" and "truthfully and completely disclose all information." Nishad Singh also pleaded guilty to defrauding FTX customers. In October 2023, all three testified that Bankman-Fried had directed them to commit fraud.

  Bankman-Fried entered a not-guilty plea on the 3rd of January 2023. His trial began in October 2023. On the 2nd of November 2023, he was convicted on every count.

  William MacAskill and Robert Wiblin, prominent leaders within the effective altruism movement, publicly condemned FTX's actions following the collapse. Before the bankruptcy, Bankman-Fried and other senior FTX and Alameda leaders were together worth roughly $16.5 billion. That ranked them as the second-largest group of benefactors to the effective altruism movement, behind only Open Philanthropy and Good Ventures. The FTX Future Fund had committed $160 million in grants and investments by the 1st of September 2022. On the 10th of November, the entire Future Fund team resigned.

  John J. Ray III estimated that customers and digital asset loan creditors would recover between 118% and 142% of their original claim values. That outcome was aided in part by Solana's price recovery in 2023. Any remaining surplus would normally flow to equity stakeholders, though both the IRS and the SEC held claims that would take priority over those distributions.