FTX

• 1. Introduction

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  In November 2022, FTX collapsed. The cryptocurrency exchange had marketed itself to newcomers as a "safe, easy way to get into crypto." Three years before the collapse, it had not existed. At its peak, the company held a $32 billion valuation.

  The questions its collapse raised were fundamental. How had an exchange that large transferred client funds to a connected trading firm without consent? Who inside the company knew about the arrangement? What happened to the funds that vanished from FTX's accounts the night the bankruptcy was filed? And how did the failure of one exchange spread damage across the broader digital asset world?

• 2. From Berkeley to the Bahamas

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  Sam Bankman-Fried and Zixiao "Gary" Wang founded FTX in May 2019. The exchange grew from within Alameda Research, a trading firm Bankman-Fried had co-founded in 2017 in Berkeley, California. Alameda's founding team included Caroline Ellison and other former employees of Jane Street. FTX stands for Futures Exchange.

  Six months after FTX's launch, Changpeng Zhao of Binance purchased a 20% stake in the company for approximately $100 million. In August 2020, FTX acquired Blockfolio, a cryptocurrency portfolio tracking app, for $150 million.

  In July 2021, FTX raised $900 million at an $18 billion valuation. The round drew more than 60 investors, including SoftBank and Sequoia Capital. Bankman-Fried then bought out Zhao's equity stake for approximately $2 billion. That September, the company moved its headquarters from Hong Kong to the Bahamas. FTX was incorporated in Antigua and Barbuda.

  On the 14th of January, 2022, FTX announced a venture fund named FTX Ventures with a target size of $2 billion. A Series C round that same month raised $400 million. FTX.US, a separate entity for US residents, announced plans to offer stock trading in February 2022.

  In August 2022, the Federal Deposit Insurance Corporation issued FTX a cease-and-desist order. The order cited "false and misleading representations" about whether FTX deposits were covered by FDIC insurance. FTX president Brett Harrison had implied in a tweet that deposits were FDIC-insured; he later deleted the tweet, and Bankman-Fried clarified publicly that they were not.

• 3. The Alameda Problem

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  Alameda Research had a "secret exemption" from FTX's automatic liquidation protocol. John J. Ray III, who was later brought in to lead FTX's restructuring, characterized the undisclosed benefit as gross mismanagement. Bankman-Fried had publicly defended Alameda's role as a liquidity provider for FTX. Bloomberg reported on the relationship in September 2022. The coverage noted that traditional equities market oversight standards would have prohibited the arrangement. Those rules did not apply to cryptocurrency exchanges.

  Between early 2021 and March 2022, Alameda Research accumulated cryptocurrency tokens ahead of FTX publicly announcing it would list those same tokens for trading. Alameda was potentially in a position to profit from others' losses on the exchange. FTX used software to hide the extent of the transfers.

  Anonymous sources cited by The Wall Street Journal said that FTX lent $10 billion of its customers' assets to Alameda in 2022. Alameda CEO Caroline Ellison disclosed to other employees that she, Bankman-Fried, Gary Wang, and Nishad Singh all knew about the decision. The funds were used in part to repay loans Alameda had taken to finance its own investments.

  Court records later filed by Ray showed that as of the 30th of September, Alameda had lent $1 billion to Bankman-Fried. It had also lent more than $500 million to FTX co-founder Nishad Singh.

  When Alameda's balance sheet became public in November 2022, the details it contained about FTT would set off the crisis in a matter of days.

• 4. The CoinDesk Spark

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  On the 2nd of November, 2022, CoinDesk published a report on Alameda Research's balance sheet. The report disclosed that Alameda held $3.66 billion in "unlocked FTT," $2.16 billion in "FTT collateral," and $292 million in "locked FTT." The total supply of FTT in circulation at the time was $5.1 billion. That meant a substantial share of the entire FTT supply was concentrated on Alameda's books.

  In the weeks before the CoinDesk article appeared, anonymous sources cited by Bloomberg had described Bankman-Fried as "desperately" attempting to raise money. Bankman-Fried had also been in a public dispute with Binance CEO Changpeng Zhao on Twitter over cryptocurrency regulation in the months before the article.

  Four days after the report, on November 6, Zhao announced on Twitter that Binance would sell all its FTT holdings. Binance had received FTT from FTX in 2021, when FTX bought back Binance's equity stake. Zhao cited "recent revelations that came to light" as his reason. Bloomberg and TechCrunch reported that any sale by Binance would likely have an outsized effect on FTT's price, given the token's low trading volume.

  The announcement triggered a decline in FTT and other cryptocurrency prices. Over the three days that followed, FTX faced an estimated $6 billion in customer withdrawals.

  On the 8th of November, the price of FTT dropped by 80 percent in a single day, erasing approximately $2 billion in value.

• 5. Seven Days in November

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  On the 8th of November, Binance CEO Changpeng Zhao announced a non-binding agreement to purchase FTX. He described the situation at FTX as a "liquidity crisis." The deal would not cover FTX.US. The following day, Bloomberg reported the acquisition was "unlikely" given the poor state of FTX's finances. By then, both the United States Securities and Exchange Commission and the Commodity Futures Trading Commission had opened investigations into FTX's handling of client funds.

  Later on November 9, the Wall Street Journal reported that Binance would not proceed. Binance cited FTX's reported mishandling of customer funds and the pending regulatory investigations. Bankman-Fried said in a Slack message that FTX had learned of the decision through the press. FTX's website stopped processing withdrawals the same day. Bankman-Fried said the firm's assets exceeded its liabilities but that it lacked the liquidity to meet withdrawal demand.

  By November 10, FTX's legal and compliance teams had mostly resigned. Bankman-Fried announced that Alameda Research would cease trading. The Securities Commission of the Bahamas froze the assets of FTX Digital Markets Ltd and appointed a provisional liquidator. Japan's Financial Services Agency ordered FTX Japan to suspend some operations. FTX's Australian subsidiary was placed under administration.

  The team behind the FTX Future Fund, a charitable vehicle backed by Bankman-Fried, resigned on November 10. By the 1st of September of that year, the fund had committed $160 million in grants and investments. BlockFi, a cryptocurrency lender with ties to FTX, suspended operations the same day. FTX separately sought a rescue deal from Kraken on November 10.

  On the 11th of November, FTX, FTX.US, Alameda Research, and more than 100 affiliates filed for bankruptcy in Delaware. Anonymous sources cited by the New York Times said the exchange owed as much as $8 billion. Bankman-Fried resigned as CEO. He was replaced by John J. Ray III, a corporate restructuring specialist who had previously overseen the liquidation of Enron.

  Late on November 11, over $473 million was removed from FTX's accounts in what FTX's US general counsel, Ryne Miller, described as "unauthorized transactions." The funds, primarily stablecoins, were quickly converted to Ether. FTX urged users to delete its mobile app, which it said had been compromised. Between $1 billion and $2 billion in customer funds could not be accounted for as of November 12.

  In an interview published by Vox on the 16th of November, Bankman-Fried attributed the theft to an "ex-employee." He also blamed malware on a device once owned by a former employee.

• 6. Celebrity and Sponsorships

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  FTX held naming rights to the Miami Heat's home arena, which was rebranded FTX Arena. A separate deal placed the FTX logo on the uniforms of Major League Baseball umpires. The company also signed with the Mercedes-AMG Petronas Formula 1 team to add its logo to cars and merchandise. The professional esports organization TSM struck a naming rights deal with FTX and was rebranded as TSM FTX.

  FTX also held the title sponsorship of the first season of MLB Home Run Derby X. Two tournaments in the Champions Chess Tour 2022 carried the FTX name: FTX Road to Miami and FTX Crypto Cup.

  Starting in the fall of 2021, FTX held negotiations with singer-songwriter Taylor Swift over a proposed sponsorship deal worth $100 million. Talks broke off the following spring without an agreement.

  After the company's bankruptcy in November 2022, Mercedes-AMG F1, TSM, and the Miami Heat all severed ties with FTX. The Miami Heat announced it would seek a new naming rights partner for the arena.

  Among the assets FTX employees attempted to sell on the 10th of November were the naming rights to FTX Arena itself.

• 7. Contagion and Fallout

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  Sequoia Capital wrote down its equity stake in FTX to zero on the 9th of November, recording a loss of approximately $214 million. The firm removed a published profile of Bankman-Fried from its website and replaced it with a notice to investors. Temasek followed with its own write-down on November 16. Other institutional investors who faced losses included Tiger Global Management, the Ontario Teachers' Pension Plan, SoftBank, BlackRock, and Lightspeed Venture Partners.

  Public figures who had invested in or been paid to promote FTX included Tom Brady, Shaquille O'Neal, and Stephen Curry. Model Gisele Bundchen had also served as ESG advisor to the platform. After the bankruptcy, investors sued Bundchen for her role, accusing her of participating in an alleged scheme to draw in unsophisticated investors. Anthony Scaramucci, founder of SkyBridge Capital, announced his firm was attempting to repurchase the 30% stake in SkyBridge that FTX had owned.

  Bitcoin sank to its lowest price in two years as news of FTX's collapse spread. Tether briefly dropped below its one-dollar peg to $0.97. Cronos, the exchange token of Crypto.com, lost approximately $1 billion in value in November. BlockFi moved toward bankruptcy as of November 15.

  Genesis, a subsidiary of Digital Currency Group, halted withdrawals on November 16. That halt forced Gemini, the exchange owned by the Winklevoss twins, to suspend redemptions on a service it had offered through Genesis. Grayscale Bitcoin Trust, another Digital Currency Group product, fell 20% over two weeks. As of November 14, it traded at a 42% discount to its underlying Bitcoin value. Concerns also emerged around Silvergate Bank, which had provided services to FTX and the wider cryptocurrency sector.

  FTX had also secretly invested in The Block, a cryptocurrency news outlet. Its CEO, Michael McCaffrey, had used a company-backed vehicle to fund an apartment purchase. McCaffrey resigned after the investment was disclosed.

  Investment manager Jim Chanos said the collapse would lead to "increased scrutiny and regulation." He described the cryptocurrency sector as "designed to extract fees from really unsuspecting investors." Lawrence Summers compared the collapse to both the Lehman Brothers bankruptcy and the Enron scandal.

  Richard Handler, CEO of Jefferies Group, said he had concluded that Bankman-Fried was "in over his head." Handler sought meetings in July 2022 and again in September. Bankman-Fried did not respond to the emails Jefferies staff sent on Handler's behalf.

• 8. Legal Reckoning

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  On the 12th of December, 2022, Bahamian authorities arrested Sam Bankman-Fried at the request of the United States government. The following day, the US attorney's office for the Southern District of New York charged him with fraud and conspiracy to commit money laundering. He was also charged with conspiracy to defraud the United States and violate campaign finance laws. Bankman-Fried was extradited, then released on a $250 million bond, and placed under house arrest at his parents' home in Palo Alto, California. He was arraigned in Manhattan on the 3rd of January, 2023, and pleaded not guilty. Judge Lewis A. Kaplan set the trial for the 2nd of October, 2023.

  Gary Wang, FTX's co-founder, and Caroline Ellison, who had served as Alameda's CEO, pleaded guilty to multiple charges and began cooperating with federal prosecutors. Nishad Singh, FTX's former engineering director, pleaded guilty to six charges, including three counts of conspiracy to commit fraud. Singh was a childhood friend of Bankman-Fried's brother. Ryan Salame, a former FTX executive, pleaded guilty to a campaign finance violation and to operating an unlicensed money-transmitting business.

  Salame was sentenced on the 28th of May, 2024, to 7.5 years in prison. He was ordered to pay more than $5 million in restitution and to forfeit an additional $6 million. He began serving his sentence in October 2024. Caroline Ellison received a two-year prison sentence on the 24th of September, 2024. Judge Kaplan acknowledged her cooperation but said it should not serve as a "get out of jail free card." Nishad Singh was sentenced on the 30th of October, 2024, to time served and three years of supervised release. Kaplan said Singh's role had been "much more limited" than that of other defendants. Gary Wang received the same sentence on the 20th of November, 2024. Kaplan said Wang was "entitled to a lot of credit" for his cooperation.

  In January 2024, the Department of Justice indicted three individuals for a SIM swap scheme that allegedly stole "over $400 million in virtual currency." Sources cited by Bloomberg identified the targeted company as FTX.

  In August 2024, a US court ordered FTX to pay $12.7 billion: $8.7 billion in restitution and $4 billion in disgorgement. The Commodity Futures Trading Commission called it the "largest such recovery" in the agency's history. On the 7th of October, 2024, bankruptcy judge John Dorsey approved the FTX repayment plan. Customers with balances below $50,000 would receive their full balance back, with cryptocurrency values set at the date of the collapse.

  In his sworn declaration to the bankruptcy court, John J. Ray III offered an assessment of what he had found. He stated: "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." Speaking to the House Committee on Financial Services, Ray testified that "literally, there's no record-keeping whatsoever." He told the committee the company had used QuickBooks, a small-business accounting tool, to manage its finances despite handling billions of dollars.

  A court filing submitted on the 8th of May, 2024, stated that most FTX customers would receive their full balances back. The filing also indicated a surplus would remain after those payments.