The collapse of global cryptocurrency exchange FTX has attracted huge attention. FTX collapsed and filed for bankruptcy on November 11, 2022, without funds to pay creditors and honour customer withdrawals.
Here’s How FTX Collapsed
FTX was established to be a cryptocurrency exchange “built by traders, for traders”. The group of companies under FTX is more than 100 in number and is incorporated across the globe.
By 2022, Forbes assessed the personal net of Sam Bankman-Fried, the founder and CEO of FTX, to be worth $17 billion, making him one of the richest people in the crypto world. But now, it has been revealed that close ties between FTX and Alameda Research allegedly threw both companies into bankruptcy.
On November 2, 2022, CoinDesk released a leaked balance sheet of Alameda Research. This revealed that the company’s assets amounted to $14.6 billion, with nearly 40 per cent of it comprising FTT tokens, FTX’s invented exchange token. Changpeng Zhao (CZ), the CEO of Binance, announced on social media that Binance would sell all its FTT tokens. But after only a day, Binance announced that it will not follow through with the acquisition.
Bankman-Fried resigned from the position of CEO just before filing bankruptcy petitions, and John J. Ray III, famous for handling the liquidation of Enron, was appointed as the interim CEO.
A few dubious behaviours that both regulators and other stakeholders have found surprising are -:
1. FTX entities did not keep appropriate books of account and records of its digital assets and transactions.
2. There was no separation of funds of different entities of the group and Bankman-Fried, and Gary Wang, who was the co-founder of both FTX and Alameda Research, and controlled access to the digital assets of almost all the main businesses.
3. The financial statements of the majority of the entities were not audited by any independent auditors. The veracity of the audited financial statements, which are available only for a few entities is also not very reliable, according to documents filed in the court so far.
4. Bankman-Fried reportedly communicated, and also encouraged others to do so, using applications designed to auto-delete conversations after a lapse of a certain period of time, leaving no trace relating to any decision-making process.
5. The FTX group of entities was discharging different roles and functions, including exchange, custodian, market maker, trader, and token issuer.
6. FTT Token was arguably the immediate cause of the collapse of FTX. A huge 40 per cent of assets of Alameda Research were in FTT Tokens, and FTX also showed FTT on its balance sheet. The subsequent announcement by Zhao that Binance will liquidate its FTT holding fuelled the bank run on FTT tokens.
At present, bankruptcy proceedings are undergoing, and all the assets of the relevant entities are put under the control and management of the official liquidator. Up to 500,000 Indian investors are estimated to have exposure to the FTX exchange or FTT Tokens. The possibility of a full recovery of funds for any Indian customer, or any other customer for that matter, seems highly unlikely. FTX was not licensed, regulated, or incorporated in India, and the Indian government or courts have no direct jurisdiction.
What Happened In Past?
During the 2020-21 crypto bull run, FTX was often perceived as one of the space’s most profitable, reliable, and influential marketplaces. Several factors, such as the economic downturn during the “crypto winter” has led to its downfall, according to a report named “FTX Collapse: The Chronicle and the Implications” by the National Institute of Bank Management, Pune, an autonomous apex institute established by the Reserve Bank of India (RBI) and banks.