How crypto exchange FTX crashed into billions

The rise of crypto exchange FTX has been phenomenal. In less than three years, the company was worth $32 billion and was the custodian of billions of dollars on behalf of its clients. A week ago, the FTX group collapsed like a house of cards and filed for bankruptcy.

What is FTX?

FTX is a trading platform that allows users to trade cryptocurrencies such as bitcoin and ether, as well as much more complex financial products. The company was founded in May 2019 by two MIT alumni: Sam Bankman-Fried and Gary Wang. The crypto exchange already had one million customers in February 2022.

Notably, Bankman-Fried, who appeared online with his initials SBF, quickly attained the status of a crypto guru. FTX has been used not only by private investors, but also by hedge funds and other professional players.

What is Alameda Research about?

Prior to FTX, Bankman-Fried founded Alameda Research in October 2017 to exploit price differences in crypto trading between Asia and the US. The size of these arbitrage deals has grown. That’s why Bankman-Fried decided to create its own trading platform, FTX. The link between FTX and Alameda is not understood in detail and is said to have contributed significantly to the FTX collapse.

Why is FTX broken?

On the one hand, there is suspicion that FTX has embezzled tens of billion US dollars of client funds. A large part of it is said to flow into Alameda. The company is said to be taking risky financial bets. FTX Group’s liquidity crisis has been exacerbated by the loss in value of its own cryptocurrency, FTT, which makes up a significant portion of deposits.

What role did Binance and Changpeng “CZ” Zhao play in this?

Binance is the world’s largest crypto exchange and a competitor to FTX. However, during the founding phase of FTX 2019, Binance boss Changpeng Zhao continued to act as a supporter and investor of FTX. But with the rise of FTX, the relationship between two crypto stars SBF and CZ has cooled as well. Binance returned its FTX shares for the equivalent of about $2 billion in summer 2021 and received over $500 million in FTT money as part of the deal. The FTX local currency came under heavy pressure when Binance announced it was divesting FTT holdings a little over a week ago. Shortly after, FTX filed for bankruptcy and Sam Bankman-Fried stepped down as CEO of FTX.

Didn’t Zhao want to save FTX from bankruptcy?

On Twitter, Binance promised to at least recover FTX. However, the takeover was canceled just one day later. “The problems exceed our ability to help,” he said in a sarcastic undertone in a tweet. Many observers believe that Zhao has a master plan to hasten death. Binance CEO Changpeng Zhao flatly denied this.

Should FTX customers fear for their money?

Yes, it is possible for them to lose all their deposits. The extent of the damage will depend on the remaining assets. Investors are also concerned about reports that not all remaining deposits have been secured after filing for bankruptcy. The company’s head of law, Ryne Miller, said that FTX is “exploring anomalies in wallet movements related to the consolidation of FTX balances between changes.”

What are the authorities doing?

FTX and Bankman-Fried are under scrutiny by financial regulators and law enforcement in various countries. The situation is complicated because FTX Group operates a subsidiary in the USA. However, the group is established in the Caribbean in Antigua and Barbuda and is headquartered in the Bahamas. The Royal Bahamas Police said financial investigators are working with the Bahamas Securities Commission to investigate possible criminal behavior. Bankman-Fried is reportedly still in the Bahamas.

What are the implications for cryptocurrencies like Bitcoin?

For the crypto market, the events surrounding FTX are a shock. While investors are accustomed to all kinds of scandals, the FTX crash hit the market at a delicate stage: Interest rates have been rising around the world for some time as central banks take action to combat high inflation. Some central banks are also starting to withdraw the money created during the crisis from the markets. Rising interest rates and falling liquidity are hurting risky financial assets, especially digital currencies. Accordingly, Bitcoin, Ether and other crypto assets have come under more pressure from the FTX crisis. Bitcoin alone has recently lost almost a quarter of its value to around $16,000. At the beginning of the week, he was able to recover a little.

What consequences could FTX bankruptcy have for crypto regulation?

Basically, every financial scandal requires more regulation. Officials such as Germany’s Bafin and major central banks have long argued for this. On Monday, for example, Haruhiko Kuroda, head of the Japanese central bank, spoke out in favor of stricter regulations. However, this is rocky, as a study by the International Monetary Fund (IMF) shows: Accordingly, the crypto industry is not just a particularly fast-growing field. The IMF’s Aditya Narain and Marina Moretti write that data on tight regulation is also patchy and interested market participants are extremely numerous. National efforts are also very different, and the global crypto regulation is accordingly fragmented. (SDA/kae)