The FTX scandal – What happened?

FTX was a widely used cryptocurrency exchange that allowed users to buy, sell and enter derivative contracts for various digital currencies. It was founded in 2017 by Sam Bankman-Fried and Zixiao Gary Wang and other former employees of Jane Street, in Berkeley, California. FTX gained attention after high-profile acquisitions one after the other, heavy marketing and ad campaigns, and promises of high returns to its users. Eventually, it became one of the largest crypto exchanges and a big threat to Binance crypto exchange.

However, on December 12,2022 the Bahamian authorities captured FTX’s CEO, Sam Bankman-Fried and jailed him. He was charged with fraud in FTX from the U.S. Attorney of the Southern District of New York. The court has appointed a new CEO to supervise the company during bankruptcy, John Ray. He told the U.S. House Committee that FTX had not carried out bookkeeping and looked like an old-fashioned embezzlement ⁽¹⁾.

How things unfolded with FTX

It took FTX 10 days to fail and collapse and it all began on November 2. The first catalyst on that date was by cryptosite CoinDesk saying that Alameda Research, FTX affiliated also run by Bankman-Fried held a position of $5 billion in FTT, the native coin of FTX.

This report further mentioned that Alameda’s investment fund was also in FTT. That prompted concerns in the cryptocurrency industry about Bankman-Fried’s companies undisclosed leverage and solvency.

What followed after this reveal, was rival Binance that sold all FTT tokens on November 6. When this happened more concerns where raised and investors that had funds in FTX run to withdraw their funds something that was impossible to happen since the company had no money to distribute. Customers demanded ore than $6 billion in the days that followed.

On November 7, FTX was forced to announce liquidity crisis and seek bailout from venture capitalists and then Binance.

On November 8, it is all over the media that Binance will buy FTX. Binance’s CEO Zhao tweeted “This afternoon FTX asked for our help. There is a significant liquidity crunch. To protect users, we entered into a non-binding letter of intent, to fully acquire FTX.com ⁽²⁾.

On November 9, one day after conducting due diligence Binance walks away from the deal. “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” the spokesperson told CoinDesk ⁽³⁾.

On November 10, the Securities Commission of the Bahamas took action to freeze assets of FTX Digital Markets and related parties ⁽⁴⁾.

The company filed for Chapter 11 bankruptcy protection on November 11, 2022, after CEO Sam Bankman-Fried stepped down and was replaced. Shortly after he filed for bankruptcy, on Nov.16 a class action lawsuit was filed in Florida’s federal court. The lawsuit claimed that Bankman-Fried created a fraudulent cryptocurrency exchange scheme and was taking advantage of investors. Others named in the lawsuit include Steph Curry, Shaquille O’Neal, Shohei Ohtani, Naomi Osaka, Larry David, and Kevin O’Leary, who allegedly helped Bankman-Fried facilitate the plan ⁽⁵⁾.

It is important to mention that in early 2022, Bankman-Fried was helping to bail out other cryptocurrency companies that struggled after token prices declined. The amount of these bails totaled about $1 billion. This was before the $32 billion company and the $16 billion worth CEO went bankrupt in a matter of days. In an interview he had with The New York Times on November 30, Bankman-Fried said he had just $100,000 left in his bank account.

Bankman-Fried is represented by white collar crime attorney Mark S. Cohen, a partner at Cohen and Gresser, a former federal prosecutor and part of the legal team of sex trafficker Ghislaine Maxwell. As of Caroline Ellisson, the CEO of FTX- affiliated Alameda Research, has hired Stephanie Avakian, former enforcement division chief at the Securities and Exchange Commission, to represent her along with other lawyers at her firm, WilmerHale, according to people familiar with the matter ⁽⁶⁾.

As we already mentioned above, Bankman-Fried was arrested in Bahamas and was send to the U.S. on Dec.12.

What now?

Following a court hearing on Dec. 22, a federal judge decided to release Bankman-Fried from custody after his attorneys and federal prosecutors agreed to a $250 million bond, the largest in history. The 30-year-old former crypto executive will live with his Stanford law professor parents in Palo Alto, California, be confined to the Northern California area, and wear an electronic monitoring bracelet ⁽⁷⁾.

On Jan. 3, Bankman-Fried pleaded not guilty to all criminal charges in a federal court in New York. The 30-year-old ex-mogul is accused of looting FTX customers’ deposits to support his Alameda Research hedge fund, buy real estate and donate millions of dollars to political causes. “Customer funds were also used and laundered through political donations, charitable donations and a variety of venture investments,” Danielle Sassoon, a federal prosecutor, said at the hearing ⁽⁸⁾.

Bottom Line

The implications and uncertainties that spread across the cryptocurrency industry after the failure of FTX, are ongoing and difficult to assess. However, FDGT academy always says what goes down, will come back up.