We have witnessed a lot of crypto drama in the past couple of weeks and we are also coming face to face with shocking revelations every day. On November 11, the crypto trading platform FTX filed for bankruptcy leaving the crypto world in shackles. For those who are unaware of what’s happening in the crypto industry, it might sound like another company is bankrupt because of the market conditions but there’s more to it. In fact, the FTX case of fraud is regarded as one of the most scandalous fraud cases in history.
Here’s an overview of what was going on in the company all along and how FTX’s founder lost around $16 billion over a weekend.
FTX, Sam Bankman-Fried and Almeda Research
Sam Bankman-Fried is the Founder and former CEO of FTX, who was also referred to as the next JP Morgan. He graduated from MIT in Physics and after interning for a short while, in 2017, Bankman-Fried founded the quantitative trading firm, Alameda Research which was run by his on-off girlfriend, Caroline Ellison. Later he founded FTX and rose to prominence in a short span of time.
Founded in 2019, FTX is a Bahama-based cryptocurrency exchange where people can buy, sell and trade numerous cryptocurrencies like bitcoin, Ethereum, Dogecoin, etc. FTX, which was founded only three years ago grew very rapidly as compared to its competitors in the market. The crypto industry also began to boom with the advent of FTX and the platform also came up with its own crypto trading tokens – FTT. Owning FTT allowed users to enjoy various benefits like lower trading fees, clawback prevention, etc. Many crypto companies create their own tokens to encourage their users to use their offerings and services. There was also very little transparency about FTTs which made it harder to track and also know the exact number of tokens minted.
From celebrities like Tom Brady to Canada’s Mr. Wonderful, Kevin O’Leary, FTX seemed to have an impressive portfolio of ambassadors and partners. Even Canada’s third-largest pension plan – Ontario Teachers’ Pension Plan had invested around US $95 million in FTX.
FTX was one of the biggest trading platforms because of the convenience, and options it provided to its users. Through FTX, people didn’t have to go through the hassle of understanding how cryptocurrencies work and it also offered many “to-good-to-be-true” features on the platform.
FTX was valued at $32 billion and it spent a lot of money on marketing. It is estimated that FTX spent around $200 million on marketing. From celebrities like Tom Brady to Canada’s Mr. Wonderful, Kevin O’Leary, FTX seemed to have an impressive portfolio of ambassadors and partners. Even Canada’s third-largest pension plan – Ontario Teachers’ Pension Plan had invested around US $95 million in FTX.
Many investors including venture capitalists poured a lot of money into FTX. These investors include some big names like Tiger Global Management, Sino Global Capital, Sequoia Capital, Third Point Ventures, SoftBank, BlackRock, etc.
When the crypto industry was collapsing and companies were going bankrupt, SBF and FTX, the messiah of crypto companies gave a lending hand to companies like BlockFi, Voyager, Celsius, etc.
What Happened with FTX?
While the personality of SBF and his actions would never let anyone think that something fishy was going on in the company, things began to change when CoinDesk released some insights from the balance sheet of Alameda Research. The information suggested that Almeda Research held a lot of FTX, in fact, the FTT token, which was created by its sister company. It also showed that the company’s investment foundation was also in FTT and not in other cryptocurrencies or fiat currency, which means if the value of FTT drops, the company was at risk of becoming insolvent.
This started raising concern across the crypto industry and the CEO of Binance, one of the biggest rivals of FTX announced it would be selling all of its FTT tokens which were roughly around 23 million tokens. This is where the price of FTT tokens witnessed a sharp decline. The following day, FTX started to face a liquidity crisis as after the announcement many people started withdrawals on the platform out of fear. On November 8th, the platform stopped allowing people to withdraw their holdings from it.
In two days, the value of FTX fell by 80% and Binance announced that it made an agreement with FTX to buy the company. This joy was also shortlived as Binance backed out of the deal the very next day. This is when the connection between Almeda Research and FTX became clearer and the news was full of stories related to FTX and the grave situation that the company is in.
After all of this, the assets of FTX Digital Markets were frozen by the Bahamas Securities, and the California Department of Financial Protection and Innovation also initiated an investigation into the company. On 11th November, Sam Bankman-Fired stepped down as the CEO of the company, he was replaced by John J. Ray III and also filed for Chapter 11 bankruptcy.
A few hours after filing for bankruptcy, the company said that it had been the victim of “unauthorized transactions” and moved the company’s digital assets to cold storage for security reasons. Blockchain analysts were also able to track the outflow of $400 million of assets from FTX accounts.
If you go into the details of what was going on with Almeda and FTX, some mind-blowing facts will come in front of you. The new CEO of FTX also said, “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.” This situation has set off a wave of shock in the crypto industry.
“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.”
A notice on the company’s website warns investors and says, “We strongly advise against depositing.” People have lost their life savings amidst this debacle and the fall of one of the biggest crypto exchanges is going to leave the world and crypto investors skeptical about investing in crypto. It also raises questions if regulations revolving around cryptocurrencies should be increased. Maybe then the chances of scams and fraud will reduce.