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10 Things to Know About The FTX Crisis

The FTX Arena in Miami, Florida. Photo by Jjron.

Cryptocurrency like other class of assets are a store of value, however unlike traditional asset where realization of this value is easy through locally available money and capital makert, cryptocurrencies requires specialized exchange unique to address their unique requirements that requires monetary realization.

With the invention of cryptocurrencies there has been quagmire on the transferability of value, there has been a rapid development of exchanges to offer a value exchange platforms for cryptocurrencies investors.

There are three main types of crypto exchanges where like the stock exchanges crypto traders can buy, sell and convert cryptocurrencies. The three types of cryptocurrency exchanges include centralized exchanges, decentralized exchanges and hybrid exchanges. It’s also worthwhile to note that there are more than 500 operational cryptocurrency exchanges.

The two main crypto exchanges FTX and Binance are international exchanges and among the biggest exchanges in the world processing majority of cryptocurrency trades around the world.

They both operates an arms-length US-regulated outlet, which closely follows what little regulation there is from the US government, but the bulk of the money that flows through their books is in effect unconstrained by regulatory requirements.

FTX unlike its competitor Binance it has spent millions of dollars lobbying U.S. legislators to institute crypto-friendly regulation.

This strained the relationship between the two company chief executive officers as evidenced by their twitter handles due to  Friedman being  pro-regulation while Changpeng Zhao insists that cryptocurrency should be free of regulations.

In the recent past the crypto industry has increasingly been the target of regulatory scrutiny across the globe. The cryptocurrency industry has long struggled to convince regulators, investors and ordinary customers that it is trustworthy.

FTX collapsed on 3rd November 2022 following a report by CoinDesk highlighting potential leverage and solvency concerns involving trading firm Alameda Research as sister company.

In May a similar collapse was avoided when FTX offered to buy several collapsing firm when the  when the cryptocurrency market experienced a US dollar 2 trillion crash.

Its fall has rippled through the industry and the department of Justice has kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a trading firm that Mr. Bankman-Fried also founded.

FTX was the major competitor to Binance and both companies chief executive officer had been on a social media duel trying to outsmart each other. This kind of duel may have led to this level of manipulation by Binance to get FTX out of the way.

1.FTX  was The Second Largest Exchange in The World Until Its Collapse

FTX was until its collapse  the world’s second largest cryptocurrency exchange after Binance headquartered in the Bahamas though managed from the USA with its biggest offices being in Chicago and Miami.

The company has built its business on risky trading options that are not legal in the United States

2.The Genesis of The Crisis Can Be traced To Binance

The  FTX’s troubles  could be traced back in July 2021 ,when Binance an early investor in the  TFX exchange, sold its stake in its rival for $2.1 billion worth of FTT, a token launched by FTX.

n the year 2021, Changpeng Zhao, the chief executive of Binance, sold his stake in FTX back to Mr. Bankman-Fried, who paid for it partially with FTT tokens. This may have given him a hint that FTX had liquidity challenges.

At the time, the move was seen as a logical parting of ways; a rift had formed between Bankman-Fried and , who had differing views on the approach to regulating crypto.

3.The FTX Crisis Were Triggered by an Alarmist Article on CoinDesk

FTX Founder Samuel Bankman Fried in 2022 Photo by US Senate.

The slump was triggered by an article appearing on 2nd November 2022 Issue of the CoinDesk a crypto industry news service titled Divisions in Sam Bankman-fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet.

It claimed that the balance sheet of Alameda, a crypto hedge fund owned by FTX’s founder, Sam Bankman-Fried, held billions of dollars worth of FTX’s own cryptocurrency, FTT, and had been using it as collateral in further loans. This implied that a fall in FTT’s value could damage both businesses, given their shared ownership. But FTT itself had no value beyond FTX’s longstanding promise to buy any tokens at USD 22, prompting fears that the whole institution foundation was shaky.

On Nov. 2, the crypto publication CoinDesk reported on a leaked document that appeared to show that Alameda Research, the hedge fund run by Mr. Bankman-Fried, held an unusually large amount of FTT tokens.

4.FTX Crisis Were Caused by Corporate Missteps

 Mr. John Ray III, a turnaround and restructuring lawyer who worked on the liquidation of the collapsed energy giant Enron, was appointed the new FTX chief upon filling bankruptcy.

In his inauguration speech he described the crisis to a result of numerous corporate missteps. He described the situation between Alameda and FTX as unique that would have been stemmed out by regulations if they were any. He concluded that  need for funds by Alameda to run its trading business could have been the main reason Mr. Bankman-Fried created FTX in 2019.

He explains that the way the two entities were set up meant that trouble in one unit shook up the other.

He also noted that FTX used of software to conceal the misuse of customer funds. There by arguing that he could not trust financial statements assembled under Mr. Bankman-Fried’s leadership as accurate.

Sequoia Capital a Venture Capital firm that had ploughed about US Dollar 150m into FTX said amidst the crisis that the company was facing not just a liquidity crunch but solvency problems.

5.A Failed Bail Out Deal Accelerated the Crisis

Binance CEO Zhao then stepped in to rescue FTX, agreeing on 7th November offered to buy the company.

The crisis was kicked into high gear on 8th November when Binance’s chief executive, Changpeng Zhao, tweeted that his company was selling its FTT holdings, worth about US Dollars 500m, because of recent revelations that have come to light.

He indicated that the discoveries in the due diligence process made him to consider stepping away from the deal since the issues that had been raised were beyond his ability to help, this eroded the public confidence further.

6.There Were Panic Withdrawals

The value of FTT collapsed, and FTX customers started withdrawing funds in a bank-run-style exodus.

Bankman-Fried in a report to Reuters said the firm had suffered a giant withdrawal surge as users rushed to take out US Dollar 6billion in crypto tokens from FTX over a three-day period against a normal daily withdrawal of tens of millions of dollars, Bankman-Fried told his employees.

The company either needs to find billions of dollars to meet customers’ withdrawal demands, or to stem the exodus by finding a way of reassuring them their money is safe.

That is never easy when so many customers are rushing for the door. Bloomberg reported on Thursday that Bankman-Fried had said the firm needed $4bn to stay solvent, with a funding gap of  US Dollars 8bn.

FTX scrambled to process requests for withdrawals, which amounted to an estimated US Dollars 6 billion over three days. It seemed to enter a liquidity crunch, meaning it lacked the money to fulfil requests.

7.FTX Lost US Dollars 400 Million in Hacking Attack 

After over130 firms of the crypto conglomerate FTX  filed for bankruptcy protection, FTX announced that they had suffered a hacking  attack. 

FTX suffered a loss of approximately $400 million worth of crypto to a yet-unidentified hacker. The FTX exchange known to be among the top 35 money holders on the Ethereum Blockchain network.

The news  also caused a panic selling in the crypto world that contributed to the already diluting crypto market.

It’s believed that the hacker may have been an insider as the attacker used verified personal accounts on the crypto exchange Kraken to cover transaction fees.

8. A Panic  Sell Led to 90 % Price Drop in FFT Tokens

Binance announced on 6th November that it would sell all its FTT tokens, claiming to have had severe revelations on the underhand transactions in FTX. This forced the traders to rush to pull out of FTX, fearful that it would collapse. The price of FTT, a native cryptocurrency token for FTX, has dropped more than 90 percent since 8th November 2022. The price of Bitcoin is down about 19 percent this month, and the price of Ether is down about 24 percent.

9.FTX Crisis Led to Bearish Move in The Cryptocurrency

The Wall Street Journal reported that FTX had loaned US Dollar10billion of customer funds to Alameda to gamble with which was a substantial proportion of the exchange’s US Dollar 16bn in assets base. This eroded crypto investors confidence  and further on the FTX   pitched the digital asset market into a bearish move through out the world with Bitcoin dropping from US dollar 69,000 to 18,000 between 2nd November and 25th November 2022.

10.There was  Corporate War Between FTX and Binance

Binance CEO Changpeng Zhao Speaking at Vietnam NFT Summit 2022. Photo By Aevozer. Wikimedia.

After the FTX filling bankruptcy , makert analyst are postulating that Binance would have been the protagonist and would have crafted the fall of FTX following Changpeng Zhao  remarks about Samuel Bankman-Fried role in lobbying for regulation.