FTX bankruptcy

The FTX bankruptcy refers to the collapse of the FTX cryptocurrency exchange, owned by Sam Bankman-Fried, beginning in November 2022. On November 2, 2022, CoinDesk published a piece stating that a trading company called Alameda Research, also owned by Bankman-Fried, held a disproportionately large amount of FTX’s cryptocurrency token, or asset, called FTT. This triggered a competing cryptocurrency exchange, Binance, to sell all their shares of FTT. FTT’s value dropped significantly and FTX began to search for new investments from venture capitalists. They also asked Binance for help. Their competitor agreed to buy FTX on November 8, 2022 but backed out of the deal on November 9. On November 11, Alameda Research and FTX declared bankruptcy and Bankman-Fried stepped down as CEO of FTX. Bankruptcy proceedings continued throughout 2023 as the company tried to recover money owed to its creditors. Meanwhile, Bankman-Fried was arrested and charged with fraud, money laundering, and campaign finance violations. In November 2023, he was found guilty of seven fraud and conspiracy charges, and in March 2024, he was sentenced to twenty-five years in prison.

Background

In May 2019, Sam Bankman-Fried joined with Gary Wang, who once worked at Google, to found FTX. The company was a cryptocurrency exchange, a virtual place where investors could buy, sell, trade, and invest in cryptocurrency products. They specialized in risky investments called derivatives and leveraged products, as well as non-fungible tokens (NFTs) and other digital investments. The company made money by charging investors for transactions completed through their platform.

FTX gained value quickly. By July 2021, when they were seeking investments from venture capitalists, the company was valued at $19 million. By October 2021, they were valued at $25 million. They secured investments from some of the most prominent venture capital firms, including Tiger Global, Temasek, and SoftBank Group. On January 31, 2022, FTX was valued at $32 million.

In July 2022, FTX offered to help two other crypto exchanges that were struggling: BlockFi and Voyager Digital. No one realized there were problems with FTX until CoinDesk published their article on November 2, 2022.

Alameda Research was founded before FTX in 2017. It was a small trading firm designed to purchase cryptocurrencies at relatively low prices in one market, then sell them in another market where the prices were higher. The difference between prices made up the firm’s income. To make as much money as possible. Alameda funded their trades with borrowed, or leveraged, money.

In fact, Bankman-Fried started FTX to generate more money for Alameda Research to invest. FTX also started its own cryptocurrency, or token, as part of this process and called it FTT. Traders on FTX who owned FTT got discounts on all the trades they placed on the platform, so it became popular because many wanted this discount.

Alameda used the revenue from FTX to increase its trades. It also bought and sold FTT around the world to boost the value of the currency and took out loans based on the value of FTT that it held.

In spring 2022, cryptocurrency prices fell. Some concerned Alameda investors asked for over $2 billion back because of concerns over risky investments. Eventually, FTX had to use shares of FTT that were invested by people on the platform (not its own holdings) to keep Alameda in business.

Overview

In November 2022, after it became clear that FTX and Alameda Research were not going to recover and Binance was not going to rescue them, John J. Ray III was appointed by the courts as the new CEO of FTX. He was known for leading other businesses while they were trying to find the money due to creditors. Ray promptly criticized the management of FTX after viewing its balance sheet and other official paperwork and worked to recover funds that could be used to repay FTX's creditors. Bankruptcy proceedings for FTX continued throughout 2023. At the start of 2023, an estimated 1 million entities were owed money; the company's top fifty creditors, which included large financial firms, were owed over $3 billion. In October 2023, the company revealed a plan to repay 90 percent of distributable assets to customers; by that point, FTX had recovered an estimated $6.9 billion out of the $8.7 billion shortfall it reported when it filed for bankruptcy the previous year.

To complicate matters, FTX also reported a breach of security that may have resulted in the loss of customer funds. On November 12, 2022, the company reported unauthorized transactions. Analytics firms confirm that between $473 million and $659 million was pulled out under dubious circumstances. Digital fingerprints left behind after the hack led some to believe that it was an inside job, though FTX maintained that the money was taken by an outside entity. The source of the breach remained undetermined by late 2023.

In addition to facing charges of fraud and money laundering, which were based on the ways he used FTT that belonged to FTX investors to prop up Alameda, Bankman-Fried also faced charges related to violations of political campaign finance laws; he was arrested in the Bahamas in December 2022. Prosecutors argued that he donated millions of dollars that also belonged to his investors, not to him.

Along with Bankman-Fried, other leaders of both FTX and Alameda Research also faced prosecution. Caroline Ellison, who was CEO of Alameda at the time of its bankruptcy filing, and Gary Wang (co-founder of FTX) both began working with prosecutors with the hopes of getting reduced sentences. They both faced fraud and money laundering charges, similar to those of Bankman-Fried. Ellison was sometimes Bankman-Fried’s girlfriend, and both lived and worked in a large villa in the Bahamas along with many other people on staff at both companies. Some high-profile individuals who had invested in FTX and helped promote the company in its marketing campaigns, including professional football player Tom Brady and supermodel Gisele Bündchen, were named in a class-action lawsuit which alleged that they had helped promote the sale of unregulated securities.

Bankman-Fried first appeared in federal court in New York City in December 2022 and was released on $250 million bail to home detention at his parent's home; the following month, a judge scheduled his trial for October 2023. In August 2023, Bankman-Fried's bail was revoked after he engaged in alleged witness tampering, and he was imprisoned in the Metropolitan Detention Center in Brooklyn, New York. His trial began as scheduled in October 2023; the following month, a jury convicted him on all seven fraud and conspiracy charges after less than five hours of deliberation. At his sentencing hearing in March 2024, Bankman-Fried received twenty-five years in prison, three years supervised release, and was ordered to forfeit $11 billion in assets. As he was sentenced, the judge remarked that he lacked respect for the law, lied while testifying under oath, and failed to take responsibility for his actions.

Federal cases do not offer parole, but good behavior or using the First Step Act may allow Bankman-Fried to reduce his sentence slightly. In September 2024, he filed an appeal of his sentence, and the following month, the company's $14 billion bankruptcy plan was published.

FTX was not the only crypto exchange to file for bankruptcy between November 2022 and December 2024. Voyager Digital, BlockFi, Celsius Network, Genesis Global Capital, Australian Crypto Exchange, Bittrex Global, Txbit, and Bitfront also went bankrupt amid widespread volatility in the cryptocurrency market. All these exchange failures raised questions about how, when, and where to regulate cryptocurrency exchanges. Because they dealt in a new kind of asset, they often did not fit or fall under existing regulations. In the United States, there was even argument about whether regulating them fell under the Commodities and Futures Trading Commission (CFTC), which regulates commodities, or the Securities and Exchange Commission (SEC), which regulates other kinds of investments. Congress had proposed two bills offering different structures for regulating cryptocurrency, but both expired at the end of 2022 without being voted into law.

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