Chapter 4: Bankruptcy of FTX

November 2022 saw the beginning of the bankruptcy proceedings for FTX, a cryptocurrency exchange situated in the Bahamas. The fall of FTX, which was brought on by an increase in customer withdrawals that revealed a hole in FTX's accounts worth $8 billion, was the motivation behind the company's decision to file for bankruptcy. The cryptocurrency exchange FTX had more than one million subscribers prior to its demise, making it the third-largest cryptocurrency exchange in terms of volume.

According to an article that was published by CoinDesk on November 2, 2022, Alameda Research, a trading firm that is linked with FTX and is owned by Sam Bankman-Fried, the chief executive officer of FTX, possessed a considerable quantity of FTT, which is the exchange token that FTX uses internally. An increase in the number of withdrawals from FTX was brought about by the article; however, consumers eventually found themselves unable to reclaim the funds that they had deposited in the exchange. A bankruptcy petition was submitted on November 11 by FTX, Alameda Research, and more than one hundred other connected organizations. After resigning from his position as CEO of FTX, Bankman-Fried was succeeded by John J. Ray III.

The fall of FTX has had a significant influence on cryptocurrency markets, with analogies being drawn to the Enron crisis and the Madoff investment scandal. Federal prosecutors have called the collapse of FTX as "one of the biggest financial frauds in the history of the United States." The assets of one of FTX's subsidiaries were placed under a freeze by the Securities Commission of the Bahamas after the company filed for bankruptcy. It was stated that Bankman-Fried's net worth, which had been estimated to be sixteen billion dollars prior to the collapse, had been completely wiped out, and a number of institutional investors in FTX wrote off their investment holdings in the company. FTX was thereafter subjected to a "unauthorized transaction" that resulted in the theft of approximately 473 million dollars. A ripple effect was caused across cryptocurrency markets as a result of the failure of FTX, which caused the price of Bitcoin to drop to its lowest level in the past two years.

Key officials from FTX and Alameda, including Caroline Ellison, Gary Wang, and Nishad Singh, entered guilty pleas to allegations of cheating FTX clients and other related offenses in the latter half of 2022 and just after the beginning of 2023. Bankman-Fried was the one who instructed all three of them to commit fraud, according to the testimony that they gave in October of 2023. Sam Bankman-Fried was found guilty of cheating clients of FTX and lenders of Alameda Research with a conviction that was handed down on November 2, 2023.

In the year 2017, Sam Bankman-Fried was one of the cofounders of Alameda Research, a cryptocurrency trading company. In the year 2019, Bankman-Fried came up with the concept of establishing a cryptocurrency exchange named FTX in order to assist in generating cash that could be used to fund Alameda's activities. Bankman-Fried served as the Chief Executive Officer of both firms until October 2021, when he formally resigned from his post at Alameda. Following his departure, traders Caroline Ellison and Sam Trabucco were promoted to the role of co-CEO. Several rumors circulated that Ellison was involved in a romantic relationship with Bankman-Fried. Bankman-Fried maintains ownership of ninety percent of Alameda as of August 2021.

The rest of the cryptocurrency industry has been paying careful attention to Alameda and FTX because of their close relationship and the potential conflicts of interest that could arise between them. Once upon a time, Alameda was the most active trader on FTX, which contributed to the exchange's liquidity. The known wallets of Alameda were the greatest stablecoin depositors and sources of liquidity to all of FTX's known wallet addresses between the dates of June 1, 2022 and July 22, 2022. They were responsible for ten percent of Tether transfers and thirty percent of USD Coin transfers on the exchange throughout that time period. John J. Ray III asserts that Alameda was granted a "secret exemption" from the auto-liquidation procedure that was implemented by FTX.

According to anonymous sources who spoke to the Wall Street Journal, Alameda Research experienced a string of losses in the months of May and June 2022. As a consequence of these losses, FTX decided to lend the trading firm more than half of its customer cash. The sources stated that FTX CEO Sam Bankman-Fried described this choice as a "poor judgment call." FTX's terms of service made it clear that this was not permitted in any way. According to an article that was published in the Wall Street Journal on November 12, 2022, unnamed sources stated that Caroline Ellison, the CEO of Alameda, stated that she, Bankman-Fried, Gary Wang, and Nishad Singh were aware of that choice with regard to the company. On November 14, 2022, the New York Times published an article that stated the same thing. For the purpose of concealing the misuse of customer funds, FTX utilized software.

As a result of months of discussions and disagreements between Changpeng Zhao, the CEO of Binance, and Bankman-Fried, tensions between the two individuals had increased in the days leading up to the crisis. In 2021, Zhao's company Binance had acquired $2.1 billion in Binance USD and FTT coins as a result of a transaction in which FTX bought back an ownership position that Binance had held in FTX. By the beginning of November 2022, Binance possessed 23 million FTT tokens, which were valued at approximately $529 million at the time.

Binance had the intention of selling its interests in FTT, according to an announcement made by Zhao on November 7th, 2022. The price of the token dropped significantly as a consequence of the sale of Binance's holdings in FTT, which, when combined with the low trading volume of FTT and the animosity between Zhao and Bankman-Fried, produced a compounding effect. During a deal that took place in 2021, FTX had purchased back Binance's ownership investment in FTX. As part of this transaction, Binance had acquired FTT from FTX. "Recent revelations that came to light" was the reason that Zhao gave for selling FTT, according to Zhao. It was stated by both TechCrunch and Bloomberg that any sale by Binance would most likely have a significant impact on the price of FTT due to the token's limited trading volume. The announcement made by Zhao on the impending sale, as well as the disagreements that took place between Zhao and Bankman-Fried on Twitter, led to a decrease in the price of FTT and other cryptocurrencies, which in turn resulted in $6 billion worth of customer withdrawals from that exchange. FTX was unable to satisfy the demand for more withdrawals, and on November 8th, Bankman-Fried and Zhao jointly stated that Binance had entered into a non-binding agreement to purchase FTX. This was done to ensure that clients were able to retrieve their assets in a timely way. There was no mention of the sale of FTX.US in the agreement. On his Twitter account, Zhao made the announcement that the company would soon finish its due diligence. He also mentioned that all cryptocurrency exchanges should refrain from using tokens as collateral. In addition, he stated in his writing that he anticipated that FTT will be "highly volatile in the coming days as things take shape." During the day when the announcement was made, the value of FTT dropped by eighty percent.

According to Bloomberg, the acquisition of FTX by Binance is "unlikely" due to the bad status of FTX's finances. This statement was made on November 9th. Bloomberg also stated that the United States Securities and Exchange Commission and the Commodity Futures Trading Commission were conducting an investigation into the nature of the linkages that FTX had to Bankman-Fried's other holdings as well as the manner in which it handled client monies. It was reported later that day by the Wall Street Journal that Binance will not proceed with the acquisition of FTX even though they had agreed to do so. FTX's alleged mismanagement of customer cash and ongoing investigations into the company were mentioned by Binance as the reasons for the company's decision to opt out of the transaction. FTX had learned of Binance's worries and decision from the press, according to Bankman-Fried, who stated this information in a message through Slack.

According to the website of FTX, which was updated on November 9th, the company was not processing withdrawals at that time. Bankman-Fried stated that despite the fact that the company's assets were worth more than the deposits made by its customers, the company would require cash from outside sources in order to satisfy the demand for withdrawals because of a shortage of liquidity. According to a statement made by Bankman-Fried on November 9th, FTX.US, which is a different company, is "not currently impacted" by the situation.

An article published by Axios on November 10 stated that FTX had approached Kraken about the possibility of a rescue arrangement. Bankman-Fried issued a number of remarks on November 10th, in which he admitted responsibility for the failure of FTX and indicated that the company was striving to raise ten billion dollars in emergency funding in order to maintain its financial stability. Additionally, Bankman-Fried disclosed that Alameda Research will be terminating its operations and suspending its trading. By the 10th of November, the majority of the in-house legal and compliance teams at FTX had resigned from their...