Bankruptcy of FTX

• 1. Origins And Operations

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  Sam Bankman-Fried founded Alameda Research, a cryptocurrency trading firm, in 2017. He launched FTX, the exchange that would become his empire, in 2019 to generate revenue for Alameda's activities. By August 2021, Bankman-Fried owned 90% of Alameda while serving as CEO of both companies. The relationship between the two entities created immediate conflicts of interest within the industry. Alameda became the largest trader on FTX, providing liquidity to the platform. Between June and July 2022, Alameda wallets accounted for 10% of Tether transfers and 30% of USD Coin transfers on the exchange. John J. Ray III later described how Alameda held a secret exemption from FTX's auto-liquidation protocol. Anonymous sources told the Wall Street Journal that FTX lent more than half its customer funds to Alameda after losses occurred in May and June 2022. This lending decision violated FTX's terms of service but was described by Bankman-Fried himself as a poor judgment call.

• 2. The Liquidity Crisis

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  On the 2nd of November 2022, CoinDesk published an article revealing that Alameda Research held significant amounts of FTT tokens. The publication triggered a sudden spike in withdrawals from FTX customers. Within days, depositors found they could no longer retrieve their money from the exchange. On November 8, Bankman-Fried announced that Binance had entered into a nonbinding agreement to purchase FTX. That same day, the FTT token lost 80 percent of its value. By November 9, Bloomberg reported the acquisition was unlikely due to FTX's deteriorating financial state. Bankman-Fried stated on November 9 that while assets exceeded client deposits, the firm lacked liquidity to meet withdrawal demands. He claimed FTX.US remained unaffected despite the crisis spreading through other subsidiaries. Employees began selling company assets including Embed Financial Technologies and naming rights to FTX Arena on November 10. Constance Wang, FTX COO, resisted urges from Ryne Miller to end trading operations. Miller informed other executives he believed there was zero chance of securing further investment. On November 11, Bankman-Fried filed for bankruptcy alongside over 100 affiliated entities.

• 3. Binance Rescue Attempt

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  Changpeng Zhao, CEO of Binance, had been engaged in months of arguments with Bankman-Fried before the crisis erupted. In early November 2022, Binance held 23 million FTT tokens worth approximately $529 million at current market rates. On November 7, Zhao announced plans to sell all Binance holdings in FTT. The sale combined with low trading volume caused the token price to plummet dramatically. Bloomberg and TechCrunch warned that any large-scale sale would have outsized impact given the token's limited circulation. The announcement led to $6 billion in customer withdrawals from FTX within hours. Bankman-Fried and Zhao jointly announced the acquisition deal on November 8 to protect customer assets. However, Bloomberg called the transaction unlikely by November 9 due to poor financial conditions. The Wall Street Journal reported later that day that Binance would not proceed with the purchase. Binance cited mishandling of customer funds and pending investigations as reasons for walking away. Bankman-Fried learned about Binance's concerns through press reports rather than direct communication. He stated in a Slack message that FTX had discovered these issues via media coverage. The failed rescue attempt left customers unable to withdraw their deposits.

• 4. Unauthorized Fund Theft

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  Late on the 11th of November 2022, approximately $473 million disappeared from FTX through unauthorized transactions. Ryne Miller characterized the movement of funds as an unauthorized transfer rather than a standard business operation. Most stolen money consisted of stablecoins like Tether which were quickly converted into Ether. This conversion method is commonly used by cryptocurrency thieves to prevent recovery attempts. A person speaking for FTX in Telegram chats referred to the incident as a hack and urged users to delete mobile applications. Kraken's chief security officer identified a user who paid transaction fees associated with moving the stolen funds. In an interview published November 16 by Vox, Bankman-Fried blamed malware on devices owned by former employees. The U.S. Department of Justice indicted three individuals in January 2024 for running a SIM swap scam operation. Sources told Bloomberg that the targeted company was FTX. Between one billion and two billion dollars in customer funds remained unaccounted for as of November 12. The Financial Times reported FTX held nine billion dollars in liabilities against only nine hundred million dollars in liquid assets.

• 5. Industry Contagion

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  Cryptocurrency markets experienced severe volatility following news of FTX's collapse. Tether dropped below its peg price to ninety-seven cents while Bitcoin sank to its lowest level in two years. Share prices for publicly traded crypto companies declined across the board. Solana, affiliated with Bankman-Fried, also suffered significant value losses. The crisis inspired increased withdrawals from other exchanges throughout the industry. Cronos, the token of Crypto.com, lost approximately one billion dollars in value during November. CEO Kris Marszalek provided assurances that his firm remained liquid despite market fears. Silvergate Bank covered colossal losses from FTX before announcing it would wind down operations on the 9th of March 2023. Signature Bank collapsed on March 12 after being closed by New York State regulators. This marked the third largest bank failure in United States history following Silicon Valley Bank's collapse. BlockFi filed for Chapter 11 bankruptcy protection on November 28 after halting withdrawals. Genesis halted withdrawals on November 16 causing Gemini to cease redemptions for clients using their partnership service. Grayscale saw its flagship offering decline twenty percent over two weeks preceding November 17.

• 6. Criminal Prosecutions

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  Caroline Ellison and Gary Wang pleaded guilty to fraud charges on the 21st of December 2022. Both executives agreed to cooperate fully and truthfully disclose all information concerning criminal matters. They testified that Sam Bankman-Fried directed them to commit fraud during October 2023 hearings. Nishad Singh also joined the group of executives who admitted guilt to defrauding customers. Bankman-Fried initially pled not guilty to fraud charges on the 3rd of January 2023. His trial commenced in October 2023 with testimony from multiple former colleagues. On the 2nd of November 2023, a jury convicted Bankman-Fried of defrauding FTX customers and Alameda lenders. The Securities Commission of the Bahamas froze assets of one subsidiary shortly after the collapse. Authorities in the Bahamas questioned Bankman-Fried on November 12 regarding his actions. A class-action lawsuit filed November 15 named celebrities including Tom Brady, Larry David, Shaquille O'Neal, and Kevin O'Leary. The United States House Committee on Financial Services planned hearings for December to examine the collapse.

• 7. Legacy And Restitution

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  John J. Ray III estimated that customers would recover between 118% and 142% of their claim values by 2023. Solana's recovery made it possible to begin repaying people affected by the bankruptcy. Any remaining funds normally go to stakeholders though Bankman-Fried remains the largest stakeholder. The IRS and SEC hold somewhat hazy claims that take priority over other distributions. Institutional investors like Tiger Global Management, SoftBank Group, and BlackRock face significant losses. Sequoia Capital wrote down its equity to zero dollars losing approximately $214 million. The Ontario Teachers' Pension Plan released statements addressing investor concerns about their exposure. The FTX Future Fund had committed $160 million in charitable grants before the 1st of September 2022. Leaders of the effective altruism movement condemned FTX's actions after the collapse. William MacAskill and Robert Wiblin criticized how profits from FTX funded their organization. Prior to the crash, Bankman-Fried and senior leaders were worth approximately $16.5 billion collectively. This made them the second-largest benefactors to the effective altruism movement after Open Philanthropy.