The FTX Saga and the Future of Crypto

In a matter of days, Sam Bankman-Fried fell from the golden boy of crypto to a scammer and fraud artist. Seemingly overnight, the 32 billion-dollar crypto exchange FTX declared bankruptcy on November 11, and with it many hopes and dreams for crypto itself.

A crypto exchange is similar to a broker in the stock market. They allow you to trade your crypto coin for money or other cryptocurrencies. In return for this service, the exchange charges a fee. However, a big difference between a stockbroker and these exchanges is the regulations as, currently, no regulations are put in place for the major crypto exchanges.

Picture of Sam Bankman-Fried | Source: The Wall Street Journal

Sam Bankman Fried was regarded as a hero of crypto trading. Seen as a friendly and philanthropic 30-year-old, Sam Bankman-Fried (commonly known as SBF) was, until the collapse, an industry leader. He started out his career at Jane Street, building credibility with the impressive trading shop. Soon after, SBF opened up the Alameda Research trading firm in late 2017 and soon got into the cryptocurrency scene. By early 2019, Mr. Bankman-Fried opened up FTX. Based in the Bahamas, FTX achieved credibility as one of the more reliable exchanges. He became known for his generosity, frivolously giving to charity and bailing out crypto firms. Everything looked on the up and up.

That was until November when FTX was exposed. A report on CoinDesk, a crypto news site, detailed the close ties between FTX and Alameda Research, the trading company he founded. It was found that Alameda’s financial statements consisted mostly of FTT tokens, a currency created by FTX to reward customers for trading with them. This meant that FTX was using customer tokens to fund Alameda.

This triggered a selloff in FTT tokens, most notably when Binance, the world’s largest crypto exchange, announced on November 6 that the company would sell $500 million worth of FTT. FTX customers, suspicious, ran for the door. Sam reported customers on November 7 sought to withdraw $6 billion, a quintessential financial run.

FTX didn’t have the funds, so where did it go? SBF states “poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users’ margin.” But that’s not even half the story. According to a Wall Street Journal report, FTX lent more than half of its customer assets to Alameda to fund risky bets in another crypto. The firm ran up a bill of $8 billion. Much of that money, belonging to would-be customers, is probably gone. 

On November 11 FTX, unable to pay the ever-mounting debt, filed for Chapter 11 bankruptcy. But, FTX’s shortcomings continued to unravel. It was revealed that the company had no accounting or human resources departments, as a filing in federal court brought to light. Not only that, corporate money was also used to buy real estate but wasn’t recorded. 

After the company’s collapse, major cryptocurrencies slumped, including Bitcoin, which is trading at around $16,500—a far cry from the $66,000 a year ago. FTT tokens are also losing value, dropping by over 80%. Not only that but because of the distrust already associated with crypto, investors are pushing to go back to the decentralized trading of the past. The aforementioned crypto companies FTX bailed out are struggling from its fall. Lenders such as Genesis have announced pauses in operations. Recently, BlockFi has even declared bankruptcy. The attention toward regulation has also been brought to Congress, as the customer risks could bring many of the illegal activities of the industry down. Binance is a major example, as professional traders can deploy price-manipulation algorithms which are normally against the law in regulated markets. These algorithms can cause rapid price movements up and down, making crypto extremely volatile. 

SBF and FTX continue to assure their customers that they are working to resolve the situation, but what the future holds for them, and cryptocurrency in general, is now in the hands of time.