The swift demise of cryptocurrency exchange FTX in 2022 has had
damaging domino effects on the cryptocurrency industry, stoking widespread mistrust among the public and toppling cryptocurrency services that did business with it.At the time, FTX was the third-largest crypto exchange.
The fallout will reverberate for years to come as investors, courts, and regulators try to claw back funds lost at these companies and prevent a catastrophe from happening again.Learn more about what went wrong with FTX, including the role of its founder and former CEO,
Sam Bankman-Fried.
Key Takeaways
– FTX collapsed in early November 2022 after CoinDesk reported an affiliated trading firm, Alameda Research, derived most of its value from speculative cryptocurrency tokens.
– A surge of customer withdrawals, due to concerns over this questionable financial valuation practice and unusually close relationship with Alameda, pushed FTX and Alameda into bankruptcy and shook the volatile crypto market, which lost billions and fell below a $1 trillion valuation.
– In December 2022, the U.S.government brought civil and criminal charges against Sam Bankman-Fried and top executives for misappropriating over $8 billion in customer deposits, laying the groundwork for an insolvency, and generating false financial statements inflated with niche token holdings to mask the shortfall.
– Bankman-Fried was tried in October 2023 and convicted in November 2023 on criminal charges for which he was extradited from The Bahamas to the U.S., except for one charge dropped in July 2023.He is slated to stand a second trial in March 2024 on charges filed after his extradition.
– Other major cryptocurrency services have gone out of business and come under regulatory crosshairs because they established risky financial arrangements with FTX and Alameda.
What Happened to FTX?
FTX’s collapse took place over a 10-day period in November 2022.
The catalyst was a Nov.2 scoop by crypto news site CoinDesk revealing that the majority of assets held by Alameda Research, a
quantitative trading firm and sister company also run by Bankman-Fried, consisted of FTT and other tokens invented and controlled by FTX and its insiders, rather than a fiat currency or cryptocurrency with market-driven and time-tested value.
Scores of investors and customers pulled their funds out of FTX, leading the exchange to become
insolvent and declare bankruptcy.The revelations had prompted concern across the cryptocurrency industry that FTX was overly leveraged with Alameda Research, relied on precarious financial accounting metrics, and faced associated financial management risks.
The End of FTX: A Sequence of Events
The following is a play-by-play recapping FTX’s implosion and bankruptcy, and law enforcement’s civil and criminal prosecution of Sam Bankman-Fried.
FTX Collapse Timeline—2022 & 2023
2022
– Nov.2: CoinDesk reports balance sheet for FTX’s sister trading firm, Alameda Research, is comprised mostly of FTX’s native exchange token, FTT.
– Nov.6: Rival exchange Binance sells all FTT tokens.
Customers begin taking money off FTX en masse.
– Nov.7: FTX announces liquidity crisis and seeks bailout from venture capitalists and Binance.
– Nov.8: Binance says it will buy FTX’s non-U.S.business.
– Nov.9: Binance walks away from FTX acquisition after conducting due diligence.More FTX customers withdraw funds.
– Nov.
10: The Bahamas freezes assets of FTX’s local subsidiary.Bankman-Fried admits non-U.S.
businesses face liquidity crisis and announces Alameda Research will wind down.
– Nov.11: Bankman-Fried steps down as FTX CEO and is replaced by a court-appointed CEO with restructuring experience.FTX files for Chapter 11 bankruptcy protection.
– Nov.
12: FTX reports a hack, suspected to be up to $477 million.
– Nov.18: The Bahamas takes control of FTX’s Bahamian assets.
– Dec.12: Bankman-Fried is arrested by Bahamian authorities.
– Dec.
13: The DOJ, SEC, and CFTC announce civil and criminal charges against Bankman-Fried.
– Dec.21: Bankman-Fried is extradited to face criminal charges in the U.S.
– Dec.22: Bankman-Fried is arraigned in Manhattan federal court and released under house arrest at his parents’ home on a $250 million bond.
2023
– Jan.3: Bankman-Fried pleads not guilty to criminal charges.
– Feb.23: Bankman-Fried criminally charged with additional counts.
– Mar.30: Bankman-Fried pleads not guilty to new criminal charges.
– July 20: Prosecutors alert federal judge of attempted witness tampering by Bankman-Fried.
– July 26: Judge places gag order on Bankman-Fried.
Prosecutors drop campaign finance charge.
– Aug.11: Bankman-Fried’s bail is revoked.
– Aug.
14: Bankman-Fried is transferred from house arrest to prison.
– Oct.2: Criminal trial begins for Bankman-Fried’s pre-extradition charges.
– Nov.2: Jury convicts Bankman-Fried on all counts.
Binance Sells All Its FTT Tokens
Binance, the world’s biggest crypto exchange, announced on Nov.6 that it would sell its entire position in FTT tokens—roughly 23 million FTT tokens valued at about $529 million.Binance CEO Changpeng “CZ” Zhao said the decision to liquidate the exchange’s FTT position was based on risk management, following the collapse of the Terra (LUNA) stablecoin earlier in 2022.
FTX Liquidity Crisis and Binance Deal
By the next day, on Nov.7, 2022, FTX was experiencing a
liquidity crisis.Bankman-Fried attempted to reassure FTX investors that its assets were stable, but customers demanded withdrawals worth $6 billion following the CoinDesk report.Bankman-Fried sought additional money from venture capitalists before turning to Binance, its competitor.
The value of FTT fell by more than 80% in two days.
On Nov.8, Binance announced it had reached a non-binding agreement to buy the non-U.S.business of FTX for an undisclosed sum, potentially
bailing out its close rival.
Binance Cancels FTX Bail Out
The promise of a rescue was short-lived.A day later, on Nov.8, Binance backed out of the deal.On Nov.9, 2022, the exchange said it would cancel the transaction after corporate
due diligence raised concerns about FTX’s mishandling of customer funds, among other issues.
FTX Assets Frozen
On Nov.10, 2022, The Bahamas’ securities regulator froze the assets of FTX Digital Markets, FTX’s Bahamian subsidiary, following news that Bankman-Fried was seeking up to $8 billion in
capital to bail out the exchange.
On the same day, the California Department of Financial Protection and Innovation announced it had initiated an investigation into FTX.
Bankman-Fried apologized for the liquidity crisis and admitted on Twitter (now known as X) that FTX’s non-U.S.exchange had insufficient funds
in reserve to meet customer demands.
Bankman-Fried said “poor internal labeling” caused FTX to miscalculate leverage and liquidity and that Alameda would shutter its trading operations.
Bankman-Fried Steps Down and FTX Files for Bankruptcy
Bankman-Fried stepped down on Nov.11 as CEO of FTX and a court appointed as his successor John J.Ray III, an American executive who led
energy trading firm Enron through bankruptcy proceedings after an accounting scandal fabricating corporate earnings was discovered.
FTX, along with a vast corporate structure of roughly 130 other affiliated companies, filed for
Chapter 11 bankruptcy protection the same day.The bankruptcy filings indicated FTX had assets and liabilities each in the range of $10 billion to $50 billion.
Suspected FTX Hack
Within hours of filing for bankruptcy, FTX said it was the victim of
“unauthorized transactions” and it would move its digital assets to cold storage for security purposes.
Outside analysts said they suspect about $477 million was stolen from FTX in the purported hack.
Lawsuit Filed Against FTX and Celebrity Promoters
On Nov.16, a
class-action lawsuit was filed in a Florida federal court, alleging FTX was a fraudulent cryptocurrency scheme designed to take advantage of unsophisticated investors across the U.S.High-profile celebrities and professional athletes such as Stephen Curry, Shaquille O’Neal, Shohei Ohtani, Naomi Osaka, Larry David, and Kevin O’Leary were liable for promoting FTX, the lawsuit further claimed.
The Bahamas Takes Control of FTX Digital Assets
On Nov.12, the Securities Commission of The Bahamas (SCB)
seized cryptocurrency assets held by FTX.The SCB said it instructed Bankman-Fried to move crypto assets to the regulator’s possession to protect creditors from suspected cyberattacks.
Bankman-Fried Arrested and Charged
Bahamian authorities
arrested and jailed Bankman-Fried on Dec.12, 2022, at the request of the U.S.
government.Bankman-Fried was then extradited to the U.S.on Dec.21.
On Dec.13, the U.S.Department of Justice (DOJ) unsealed an indictment charging Bankman-Fried with eight criminal counts alleging
wire and securities fraud, money laundering, and unlawful campaign finance contributions, and the U.S.
Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) brought enforcement actions pursuing civil claims of securities and commodities fraud.
According to the agencies, Bankman-Fried and top executives lied about FTX’s financial health to investors, customers, and lenders and hid a billion-dollar hole in its
balance sheet with fake financial statements, inflated valuations of speculative tokens like FTX’s FTT exchange coin, and cryptocurrencies borrowed from lenders.
Exchange
reserves were depleted, exacerbating the risk of insolvency, after FTX management allegedly misappropriated at least $8 billion in customer deposits to foot heavy Alameda losses, luxury real estate and yacht purchases, business investments, and charitable and political donations.
New FTX CEO Ray stated in a
bankruptcy court filing on Nov.17: “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.” Ray went on to tell U.S.Congress on Dec.13, that FTX practiced “no bookkeeping” and “old-fashioned embezzlement.”
Bankman-Fried Released on Bail
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 bail amount on record in the U.S.
Under the terms of his bail, the 30-year-old former crypto executive was permitted to live under house arrest with his Stanford law professor parents in Palo Alto, Calif., while wearing an electronic monitoring bracelet.Bankman-Fried
pled not guilty to all of the criminal charges on Jan.
3, 2023.
Bankman-Fried Charged Again
The DOJ filed an
additional four criminal charges related to unlicensed money transmission and other categories of fraud against Bankman-Fried on Feb.23, 2023, and a foreign bribery charge on March 28, 2023.
The superseding indictment alleged Bankman-Fried violated the
Foreign Corrupt Practices Act (FCPA) by authorizing a $40 million bribe to one or more Chinese government officials to restore Alameda Research cryptocurrency holdings frozen by Chinese law enforcement.Bankman-Fried pled not guilty to these charges on March 30, 2023.
Bankman-Fried Moved Back to Prison
On July 20, 2023, prosecutors accused Bankman-Fried of attempted witness tampering toward his ex-girlfriend Caroline Ellison by leaking contents of her diary to the New York Times.Ellison succeeded him as CEO of Alameda when he launched FTX.
A week later, on July 26, a federal judge placed Bankman-Fried under a gag order, prohibiting him from communicating with the public and the media.
Bankman-Fried then had his
bail revoked on Aug.
11 and was remanded on Aug.14, 2023, to the Metropolitan Detention Center, a notorious prison in Brooklyn.
Ellison and other FTX and Alameda Research executives, including Gary Wang,
Nishad Singh, and Ryan Salame, had been criminally charged on similar counts and agreed to testify for the government as part of their guilty pleas.
Sam Bankman-Fried could face up to 110 years in prison on the charges he has been convicted of so far, if the judge presiding over his case observes maximum sentencing guidelines.
Bankman-Fried Convicted on First Set of Charges
Bankman-Fried’s trial for seven of the eight pre-extradition criminal charges began Oct.2, 2023, and ended Nov.
1.The jury
returned guilty convictions on all seven charges on Nov.2.
Throughout the trial, executives, customers, and investors testified that Bankman-Fried directed employees or acted in his personal capacity to spend customer deposits for non-business purposes and to make material misstatements about FTX’s solvency and relationship with Alameda Research.
The DOJ had dropped an eighth charge, a campaign finance charge, on Jul.26, 2023, to comply with procedural rules of the U.S.’s extradition treaty with The Bahamas.Bankman-Fried is expected to be
tried on the five post-extradition criminal charges on March 11, 2024.
Damian Williams, the U.S.District Attorney leading the criminal prosecution, said when announcing the charges and convictions that Bankman-Fried “perpetrated one of the biggest financial frauds in American history.”
Not all of the billions lost by FTX investors and customers will be recovered, the new FTX CEO John J.Ray III told a U.S.House of Representatives committee hearing on Dec.
13, 2022.
Future of FTX and Consequences of Collapse
The broader consequences of FTX’s demise for the cryptocurrency industry will take time to unfold, but cracks have already emerged.As the largest collapse of an exchange in the short history of cryptocurrencies, FTX has deterred cautious
investors from staying put in the market, and business partners owed money have shuttered.
Crypto Contagion
Cryptocurrency exchanges like
Crypto.com downsized due to a surge of customer withdrawals following FTX’s collapse.Cryptocurrency lenders and banks BlockFi, Genesis Global, Celsius, and Voyager Digital are undergoing bankruptcy liquidations and legal proceedings themselves for authorizing severely undercollateralized loans to FTX and Alameda Research and overlooking the risk profile on repayments.One lender, Genesis, and its parent company, Digital Currency Group, were sued by the Winklevoss-founded crypto exchange Gemini for defaulting on lending agreements with Gemini’s Earn product.
Regulatory Crackdown
Regulators have called for
greater government oversight of cryptocurrencies.
Law enforcement has tightened scrutiny of cryptocurrencies, both domestically and internationally, and has sought to limit exposure to traditional markets.Members of Congress have said they are more inclined to legislate new protections governing digital tokens and exchanges.
Asset Recovery
Investors and customers
may not fully recover their assets from FTX.Creditor claims are subject to a slow-moving bankruptcy estate process and could be valued at a significant discount relative to their principal, depending on how much money the bankruptcy trustee can recoup.These measures have included tracing where cryptocurrencies went and asking politicians to return political donations.
FTX 2.0
FTX’s website is currently inactive, but there are talks of a
restructuring and return under new ownership.
The Wall Street Journal reported on Nov.8, that at least three parties are bidding to take over and reboot the failed exchange.Sources had told the Journal that FTX began soliciting buyers as early as June.
How Was FTX Hacked?
Within hours of filing for bankruptcy, FTX claimed close to $500 million in assets may have been stolen through “unauthorized transactions.” Elliptic, a crypto compliance service which spotted the outflows, said the hacker drained the wallets for several days, using a method analysts called “on-chain spoofing.” The hacker reportedly then invested those funds in the cryptocurrency ether (ETH).
What Happens Next to Sam Bankman-Fried?
Bankman-Fried will continue to stay in Brooklyn prison as he awaits sentencing on the seven guilty convictions from his first criminal trial in October 2023 and prepares for his second criminal trial scheduled for March 2024, assuming he doesn’t change his not guilty pleas on the remaining charges.
Could FTX Make a Comeback?
Companies that go bankrupt are sometimes acquired and relaunched.Buyers may see value in the takeover target, such as name recognition, intellectual property, and trade secrets.
However, business negotiations can always change and success of the relaunched company isn’t guaranteed.Variables influencing these outcomes, from macroeconomic conditions to managerial acumen and customer loyalty, are difficult to predict.
The Bottom Line
The stunning devolution of FTX and its rippling shock waves have cemented the cryptocurrency industry as a centerpiece of examination on modern
financial crime and corporate compliance where digital financial products are involved..
