Bahamas-based cryptocurrency exchange FTX was valued at approximately $32 billion at the start of November. On Nov. 11, following a failed effort to be bought by competitor Binance, FTX began bankruptcy proceedings in US federal court.
In September, Bloomberg began reporting on the intermingled nature of FTX with another Silicon Valley company, Alameda Research, which operated as a trading company on the FTX exchange. Both companies were founded by Sam Bankman-Fried, who served as CEO of FTX until it filed for bankruptcy.
The report from Bloomberg noted that Alameda functioned as a market maker on FTX early in its history and that it remained the largest depositor of stablecoins on FTX. The report stated that the nature of the relationship between the two firms, had they been subject to regulatory oversight as it applied to companies operating in traditional equities markets, would have been prohibited under U.S. securities laws.
Alameda’s role on FTX meant it was occasionally in a position to gain financially while others faced losses on the exchange. Bankman-Fried defended the relationship between the two companies as a means of creating liquidity.
On Nov. 2, 2022, Coindesk reported that a substantial portion of Alameda’s assets were held in FTT, the exchange token issued by FTX. According to Alameda’s second quarter financial report, it had assets in the amount of $14.6 billion, of which, $3.66 billion was “unlocked FTT” and $2.16 billion was “FTT collateral.”
Amongst its $8 billion in liabilities was also $292 million in “locked FTT.”
Effectively, a large portion of Alameda’s net equity was tied to the value of FTT, a cryptocurrency that was in the sole control of FTX.
Several days later, Binance CEO Changpeng Zhao tweeted that his firm intended to sell all of its holdings of FTT, citing “recent revelations that came to light” as the reason for the sale. The announcement of Zhao’s intent to sell FTT, an already low trading coin, triggered a three-day run on the cryptocurrency which cost FTX an estimated $6 billion and sent it into crisis, according to reporting from The New York Times.
On Nov. 8, 2022, Zhao announced that Binance had entered into a non-binding agreement to purchase FTX due to a “liquidity crisis” at FTX. FTT lost approximately 80 percent of its value following the announcement.
On Nov.9, the FTX website was updated to say that it was not processing withdrawals. On Twitter, Bankman-Fried assured that FTX had sufficient liquidity to cover all assets users had held in the exchange.
On Nov. 10, The Securities Commission of the Bahamas froze the assets of one of FTX’s subsidiaries, Japan’s Financial Services Agency ordered FTX to suspend some operations in the country, and FTX’s Australian subsidiary was placed under administration.
On Nov. 11, FTX, Alameda, and more than 100 affiliates filed for bankruptcy in Delaware federal court. Later that day, approximately $473 million was removed from FTX, in what has been characterized as “unauthorized transactions” and a potential hacking.
According to a Nov. 12 CNBC, report, between $1 billion and $2 billion of FTX customer finds had “disappeared” and Bankman-Fried maintained a back door to FTX which allowed him to transfer billions between FTX and Alameda.
Response from some regulators has been swift. Before the FTX bankruptcy was filed, California’s Department of Financial Protection and Innovation (DFPI) announced plans to investigate the failed crypto exchange company. Details of the investigation have been limited since it was announced.
No federal law enforcement body has yet announced formal investigations into FTX and its sudden collapse. Some sources are reporting that the U.S. Attorney’s office for the Southern District of New York has quietly begun investigating the crypto exchange and its former CEO, though nothing has been formally announced by the office or the Department of Justice.
The debacle over the sudden collapse of FTX has regulators pointing fingers and trying to take advantage of the rapid fall of a major crypto market participant.
In an interview with Coindesk, Commodities Futures Trading Commission (CFTC) Commissioner Kristin Johnson asserted that “if FTX had been a regulated entity under our regulatory umbrella, customer bonds would’ve been protected, there would’ve been liquidity reserve requirements in place [and] there would’ve been monitoring and surveillance that is not immediately available.”
Better Markets, an independent, non-profit watchdog organization, has been critical of the lack of response from the CFTC and its chair Rostin Behnam, as well as his and the agency’s push for Congress to pass crypto-friendly legislation.
“Instead of doing its job over the last year, the Chair is urging Congress to quickly give FTX and the crypto industry what they have been desperately seeking all along: (1) the smallest, least funded, least capable regulator, the CFTC, to have primary jurisdiction over the industry, and (2) access to and interconnection with the banking system to receive Federal Reserve (i.e., taxpayer) bailouts when the industry gets into trouble,” Better Market co-founder, President and CEO Dennis Kelleher said in a press release.