What Went Wrong At FTX?
The crypto trading company founded by billionaire Sam Bankman-Fried has filed for bankruptcy. In-depth look into the company’s operations have revealed some shocking details.
Earlier this month FTX, one of the largest cryptocurrency exchanges in the market, started facing liquidity issues. After the news broke out, about $6 billion worth of assets were withdrawn from the exchange. This led to the company founded by crypto billionaire Sam Bankman-Fried suspending all withdrawals, raising concerns about a possible bankruptcy and liquidation of customer assets.
On November 2nd a glimmer of hope arrived. Binance, FTX’s biggest rival and the world’s largest crypto exchange by trading volume, agreed to acquire the company after signing a non-binding letter of intent. Both Bankman-Fried and Binance CEO Changpeng “CZ” Zhao said that a due diligence process would be underway in the following days. FTX was looking to raise between $10 billion and $20 billion to solve its liquidity crunch before announcing the deal to sell all its non-US assets to Binance.
However, after reviewing the company’s finances Binance put out a statement saying that they will no longer be pursuing the deal. This added more misery to the company who is facing a shortfall of up to $8 billion. Binance’s decision to pull out from the deal also affected the crypto sector, wiping out $60 billion from the market. It also saw Bitcoin hit a two-year low by falling below $16,000.
“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” said Binance in its statement.
Bankman-Fried’s crypto empire consists of two separate entities that work together – FTX exchange and Alameda Research. While FTX acted as the exchange platform where customers deposit and withdraw their funds, sister company Alameda conducted all trades on its behalf. Thorough review of financial documents by new agency CoinDesk revealed details of a very interesting financial partnership between the two giants. FTX had moved all customer assets into the balance sheet of its sister company.
Alameda held $14.6 billion worth of assets under its custody which included $5.86 billion in FTX’s native token FTT — the single-largest asset held by the trading firm, Solana blockchain’s SOL tokens worth $1.1 billion, $3.37 billion in SRM, OKY and MAPS — all projects that count Bankman-Fried as an early investor, $134 million in cash, and $2 billion in equity securities. The company also has $8 billion in liabilities, of which $7.4 billion are in loans.
Of the FTT tokens, Alameda held $3.66 billion in “unlocked FTT”, $2.16 billion in “collateral FTT”, and $292 million in “locked FTT” that were liability to holders who staked the assets on FTX. The trading company also held $292 million in “unlocked SOL”, $863 in “locked SOL” as liabilities and $41 million in “collateral SOL”.
Although FTT gives holders several benefits like discount on transaction fees, increased commissions on referrals and other rewards when using the tokens on FTX, it is limited to the platform and also low in value. Alameda's heavy reliance on a token invented by its sister company instead of an independent supporting asset like fiat currency or Bitcoin (BTC) raised concerns regarding the firm’s financial position.
Following CoinDesk’s revelations, ‘CZ’ announced on twitter that Binance will be selling all their FTT holdings. Binance was an early investor in FTX and received $2.1 billion in FTT as a thanking gesture after selling shares in the company last July. There were also rumors about a rift between SBF and CZ which might have influenced Binance’s decision to sell its FTT.
Dumping FTT in such high volume led to the token losing 90% of its price value. Prices of SOL, SRM, OKY and MAPS — all projects invested in by Bankman — also plunged. This started a chain of events that shook the ground holding Bankman-Fried’s crypto empire. Panicked customers began withdrawing their assets from the exchange. Sequoia Capital, a venture capital with exposure to FTX, informed shareholders of its decision to write down $214 million that was invested in the company.
In an effort to minimize the impact on FTT prices, CEO Caroline Ellison tweeted that Alameda would purchase all tokens that Binance intends to sell.
FTX, who raised $400 million in January from VC firms SoftBank, Temasek, Multicoin Capital, Sequoia Capital and Paradigm to reach a total valuation of $32 billion, was a major player in the industry until recently. In August, the company was planning to buy assets held by now bankrupt crypto lenders Celsius and Voyager Digital.
The crypto-trading behemoth was under investigation of the U.S Securities and Exchange Commission (SEC), the Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC) prior to its implosion. The SEC claims FTX to have violated U.S securities laws by selling crypto assets and lending products that were unregistered as securities. Regulators are also looking into the relationship between Alameda Research and FTX US – subsidiary of the company that operates in the United States.
“We will continue to do our job as a cop on the beat. The runway is getting shorter for some of these intermediaries, I have to say,” said SEC Chairman Gary Gensler at an event hosted by the Healthy Markets Association.
Following news about an investigation by the US government, the Securities Commission of the Bahamas has frozen all assets held by FTX Digital Markets and its partners. FTX is headquartered in Nassau, capital of the Caribbean island nation. The financial regulator has appointed law firm Lennox Paton as the provisional liquidator of FTX Group. According to a statement released by the law firm, FTX directors are now “prohibited from transferring or dealing with clients without the written approval of the provisional liquidator.”
On November 11th, the once world’s third largest cryptocurrency exchange in trading volume filed for Chapter 11 bankruptcy at the Delaware bankruptcy court where FTX US is registered. The filing includes FTX Trading Ltd, FTX US and Alameda Research. With Bankman-Fried having stepped down from his role as CEO of FTX Group, the company has named John J. Ray III to lead bankruptcy procedures. John Ray oversaw the liquidation of energy-trading giant Enron Corp. as CEO after the company filed for bankruptcy in 2001.
Anthony Scaramucci, founder and managing partner of investment giant SkyBridge, announced that his company is working on buying back the 30% stake it sold in September to the now bankrupt crypto firm. Scaramucci said he felt duped by Bankman and FTX.
“I do like Sam, but i don’t understand the motivation for exactly everything that’s going on. I think people were under the impression that there was more capital there, as a result of the success that the firm had at Alameda, that portion of the business.
People bought into the argument that Alameda was a client of FTX and there was a separate Chinese wall, because Wall Street is good at dealing with conflicts like that. I think people bought into that and that was obviously a mistake,” said Scaramucci to CNBC.
The bankruptcy of FTX has put insolvent crypto-lender Voyager Digital’s fate into question. Back in September, FTX won the auction to buy all assets held by the lender for a purchase price of $50 million. Voyager has now reopened the bidding process to look for potential new buyers. Apart from a deposit of $5 million in good faith by FTX US, no assets were transferred from Voyager to the company. Voyager has also recalled 6,500 BTC and 50,000 ETH that was loaned from Alameda Research. However, the crypto lender has about $3 million worth of crypto assets stuck on the exchange at the time of writing.
Following implosions of Do Kwon’s cryptocurrency project Terra/Luna, Alex Mashinsky’s crypto banking company Celsius, and Toronto-based crypto lending platform Voyager Digital, the 2022 crypto winter has now brought down Sam Bankman-Fried’s once dominant industry player FTX and Alameda Research.
What a year it has been crypto!
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