The bankruptcy ofFTX, aBahamas-basedcryptocurrency exchange, began in November 2022. The collapse of FTX, caused by aspike in customer withdrawals that exposed an $8 billion hole in FTX's accounts,[1] served as the impetus for its bankruptcy. Prior to its collapse, FTX was the third-largest cryptocurrency exchange by volume and had over one million users.
On 2 November 2022,CoinDesk published an article stating thatAlameda Research, atrading firm affiliated with FTX and owned by FTX chief executiveSam Bankman-Fried, held a significant amount of FTX's exchange token, FTT.[2][3] The article triggered a spike in withdrawals from FTX, but eventually, customers became unable to retrieve the money they had deposited in the exchange.[4] On 11 November, FTX, Alameda Research, and over 100 affiliated entities filed for bankruptcy. Bankman-Fried resigned as FTX CEO and was replaced byJohn J. Ray III.[5][6]
The collapse of FTX has had a wide impact on cryptocurrency markets, with comparisons made to theEnron scandal andMadoff investment scandal, and was described by federal prosecutors as "one of the biggest financial frauds in American history".[7][8] Following the bankruptcy, theSecurities Commission of the Bahamas froze the assets of one of FTX's subsidiaries.[9] Bankman-Fried'snet worth, estimated at $16 billion prior to the collapse, was reported as having been wiped out,[10] and several institutional investors of FTXwrote off their investment stakes in the company.[11][12] Some $473 million in funds were later taken from FTX in an "unauthorized transaction".[13] The collapse of FTX resulted in a ripple effect across cryptocurrency markets, with the price ofBitcoin falling to its lowest level in two years.[14]
In late 2022 and early 2023, key executives from FTX and Alameda, such asCaroline Ellison,Gary Wang, and Nishad Singh, pleaded guilty to defrauding FTX customers and related charges.[15] In October 2023, all three testified that it was Bankman-Fried who directed them to commit fraud.[16] On 2 November 2023,Sam Bankman-Fried was convicted of defrauding customers of FTX and lenders of Alameda Research.[17]
Sam Bankman-Fried took to X on February 10 to state that the now-defunct FTX Exchange was never bankrupt. He stated that it was legal firm Sullivan & Cromwell's lawyers who forced the bankruptcy filing, and not him, to gain control of the assets.[18][19]
Sam Bankman-Fried cofoundedAlameda Research, a cryptocurrency trading firm, in 2017.[20] In 2019, Bankman-Fried had the idea of starting a cryptocurrency exchange to help bring in revenue to fund Alameda's activities and founded FTX.[21] Bankman-Fried was the CEO of both companies until he formally stepped down from his position at Alameda in October 2021, promoting tradersCaroline Ellison andSam Trabucco to co-CEOs.[22] Ellison was reported to have a romantic involvement with Bankman-Fried.[23] As of August 2021, Bankman-Fried still owned 90% of Alameda.[20]
The close relationship and potential conflicts of interest between Alameda and FTX drew scrutiny from the rest of the cryptocurrency industry.[24][21] Alameda was once the largest trader on FTX, bringing liquidity to the exchange.[24] Between 1 June 2022 and 22 July 2022, Alameda's known wallets were the largeststablecoin depositors and sources of liquidity to all of FTX's known wallet addresses, accounting for 10% ofTether transfers and 30% ofUSD Coin transfers on the exchange.[24] According toJohn J. Ray III, Alameda had a "secret exemption" from FTX's auto-liquidation protocol.[25][26]
Alameda Research suffered a series of losses in May and June 2022, which anonymous sources told theWall Street Journal resulted in FTX lending the trading firm more than half of its customer funds, a decision that the sources said FTX CEOSam Bankman-Fried described as a "poor judgment call".[27][28] This was explicitly forbidden by FTX's terms of service.[29] On 12 November 2022, theWall Street Journal reported that anonymous sources had said that Alameda CEOCaroline Ellison said that she, Bankman-Fried, Gary Wang, and Nishad Singh were aware of that decision.[30] The same was reported in theNew York Times on 14 November 2022.[31] FTX used software to conceal the misuse of customer funds.[25][26]
Following months of arguments and disagreements betweenChangpeng Zhao, the CEO ofBinance, and Bankman-Fried, tensions between the two had intensified days before the crisis.[32] Zhao's firmBinance had obtained $2.1 billion in Binance USD and FTT coins in 2021, following a deal in which FTX bought back an equity stake held by Binance in FTX, and in early November 2022, it had 23 million FTT tokens, worth about $529 million at the time.[33]
On 7 November 2022, Zhao announced that Binance had intended to sell its holdings in FTT.[34][33] The sale of Binance's holdings in FTT, compounded with the low trading volume of FTT and the enmity between Zhao and Bankman-Fried, resulted in the price of the token plummeting.[35][36][37] Binance had received FTT from FTX in 2021 during a transaction in which FTX bought back Binance's equity stake in FTX.[38] Zhao cited "recent revelations that came to light" as the motivation for selling FTT.[38]Bloomberg andTechCrunch reported that any sale by Binance would likely have an outsized impact on FTT's price, given the token's low trading volume.[39][40] The announcement by Zhao of the pending sale and disputes between Zhao and Bankman-Fried on Twitter led to a decline in the price of FTT and other cryptocurrencies,[41] resulting in $6 billion of customer withdrawals from FTX.[42] FTX became unable to meet the demand for further withdrawals, and on 8 November, Bankman-Fried and Zhao jointly announced Binance had entered into a nonbinding agreement to purchase FTX to ensure that customers could recover their assets in a timely manner.[43][44] The deal did not include the sale of FTX.US.[43] Zhao announced on Twitter that the company would complete due diligence soon, adding that all crypto exchanges should avoid using tokens as collateral.[45][46] He also wrote that he expected FTT to be "highly volatile in the coming days as things develop". On the day of that announcement, FTT lost 80 percent of its value.[47]
On 9 November, Bloomberg called the acquisition of FTX by Binance "unlikely" due to the poor state of FTX's finances.[48] Bloomberg also reported that the United StatesSecurities and Exchange Commission andCommodity Futures Trading Commission were investigating the nature of FTX's connections to Bankman-Fried's other holdings and its handling of client funds.[49] Later that day, theWall Street Journal reported that Binance would not move forward with the deal to acquire FTX.[50] Binance cited FTX's reported mishandling of customer funds and pending investigations of FTX as the reasons for not pursuing the deal.[51] Bankman-Fried said in aSlack message that FTX had learned through the press about Binance's concerns and decision.[52]
On 9 November, FTX's website said that it was not processing withdrawals at that time.[42] Bankman-Fried said that although the firm's assets were worth more than its clients' deposits, it would need funds from outside to meet demand for withdrawals due to a lack ofliquidity.[53][54] Bankman-Fried stated on 9 November that FTX.US, as a separate company, was "not currently impacted" by the crisis.[55]
On 10 November,Axios reported that FTX approachedKraken for a potential rescue deal.[56] Bankman-Fried made several statements on 10 November, taking responsibility for FTX's failure and indicating that FTX was attempting to raise $10 billion in emergency financing to remain solvent.[57][58][59] Bankman-Fried also announced that Alameda Research would cease trading and end operations.[60] FTX's in-house legal and compliance teams had, for the most part, resigned by 10 November.[61][62] Anonymous sources cited by theWall Street Journal on 10 November said that Alameda Research owed FTX some $10 billion, as FTX had lent funds placed on the exchange for trading to Alameda so that Alameda could make investments with the money.[63]
Though Bankman-Fried said that FTX.US customers did not have reason to worry on Twitter on 10 November, employees began attempting to sell assets belonging to the firm on the same day.[64] These assets include stock-clearing company Embed Financial Technologies and the naming rights toFTX Arena.[64] Disagreements emerged between remaining executives, with Bankman-Fried and FTX COO Constance Wang resisting urges from Ryne Miller, a member of FTX US's legal team, to end trading on the exchanges.[65] Bankman-Fried continued to seek funding even as Miller informed other executives that he believed there was a "0%" chance of securing further investment.[65] Miller and other executives asked Bankman-Fried to cede control of FTX US to them, which he resisted.[65] On 11 November, Bankman-Fried announced that he had filed FTX US for bankruptcy along with FTX and Alameda.[66] Bankman-Fried continued to seek capital for FTX after the bankruptcy, and claimed without evidence that a potential backer had emerged soon after the filing.[65]
On 12 November, anonymous sources cited by theWall Street Journal said Alameda CEOCaroline Ellison disclosed to other Alameda employees that she, Sam Bankman-Fried, Gary Wang, and Nishad Singh knew that client deposits were transferred from FTX to Alameda.[67] An anonymous source cited by theNew York Times on 14 November said the same.[68] Anonymous sources cited by theWall Street Journal said the funds were used in part to pay back loans Alameda had taken to make investments.[67] On 10 November, theSecurities Commission of the Bahamas froze the assets of one of FTX's subsidiaries, FTX Digital Markets Ltd, "and related parties", and provisionally appointed an attorney as liquidator.[69][70] Japan'sFinancial Services Agency ordered FTX Japan to suspend some operations.[71][72] The company's Australian subsidiary was placed underadministration.[71]
On the same day, a team running the FTX Future Fund, a charitable group bankrolled by Bankman-Fried, announced their collective resignations.[73] Future Fund had committed $160 million in charitable grants and investments by 1 September of that year.[74]
On 11 November, FTX, FTX US, Alameda Research, and more than 100 affiliates filed forbankruptcy in Delaware.[75][73][76] Anonymous sources cited by theNew York Times said that the exchange owes as much as $8 billion.[73] The crypto lenderBlockFi, which was affiliated with FTX, announced on 10 November that it was suspending operations as a result of FTX's collapse.[73] Bankman-Fried resigned as CEO and was replaced byJohn J. Ray III, acorporate restructuring specialist who previously oversaw the liquidation ofEnron.[75][76][77] As of 12 November, Bankman-Fried told Reuters that he was still in the Bahamas,[78] though other high-ranking FTX employees had begun leaving for Hong Kong, the location of the company's former headquarters, or other locations.[79] Authorities in the Bahamas, including theRoyal Bahamas Police Force, questioned Bankman-Fried on 12 November.[80] Despite FTX's bankruptcy, Bankman-Fried continued to attempt to raise money for the firm during the weekend of 12 and 13 November.[81]
Late on 11 November, some $473 million in funds were removed from FTX through what Ryne Miller, FTX US's general counsel, characterized as "unauthorized transactions".[82] Miller further announced that FTX and FTX US intended to move remaining funds denominated in cryptocurrency to offline "cold storage".[82] The funds taken from FTX were mostlystablecoins such asTether, and were quickly exchanged forEther, a method used by cryptocurrency thieves to thwart attempts to retrieve stolen funds.[83] A person speaking on behalf of FTX in aTelegram chat referred to the "unauthorized transactions" as a "hack" and encouraged users to delete FTX mobile apps as they were compromised.[79]Kraken has since announced its assistance in identifying the perpetrator.[84] On 14 November, Kraken's chief security officer said on Twitter that the firm knew "the identity" of a user who paid transaction fees associated with moving the stolen money through their Kraken account.[85] In an interview with Kelsey Piper published 16 November byVox, Bankman-Fried blamed an "ex-employee" or malware on a device owned by an ex-employee for the theft.[86]
In January 2024, the U.S. Department of Justice indicted three individuals for running aSIM swap scam operation that allegedly stole “over $400 million in virtual currency” from an unspecified company between November 11–12, 2022.[87] Sources told Bloomberg that the company was FTX.[88]
Between $1 billion and $2 billion in customer funds reportedly could not be accounted for as of 12 November.[89] TheFinancial Times reported that FTX's balance sheet shortly before the bankruptcy showed $9 billion in liabilities against $900 million inliquid assets, $5 billion in "less liquid" assets, and $3.2 billion in illiquidprivate equity investments.[90] American columnistMatt Levine described that among its less liquid assets that "[FTX] relied on to be able to pay out customer balances" were twotokens that "it had just made up", referring to the FTX Token and Serum, a separate cryptocurrency accounted for in the balance sheet.[91]
Contagion fears and impact on cryptocurrency markets
Cryptocurrencies experienced swings and declines in value as news of FTX's collapse first emerged in early November:Tether dropped below its peg price of $1.00 to $0.97[92] and Bitcoin sank to its lowest price in two years.[76] Share prices for publicly traded cryptocurrency companies declined.[93] The price ofSolana, which was affiliated with Bankman-Fried, declined as well.[94] The crisis at FTX has inspired an increase in withdrawals from other exchanges.[95] A decline in the value of Cronos, the token of exchangeCrypto.com, triggered fears of the potential for a collapse similar to that of FTX and spurred withdrawals from the platform.[96] CEO Kris Marszalek provided assurances that the firm was liquid and that it did not use Cronos in a manner similar to the way FTX used FTT.[96] Bloomberg reported that the collapse of FTX exacerbated institutional skepticism of cryptocurrencies as an asset class.[97]
BlockFi, a cryptocurrency lender, filed for Chapter 11 bankruptcy protection on 28 November; the firm had earlier begun preventing withdrawals.[98][99] The company disclosed "significant exposure" to FTX on 14 November.[99] Another cryptocurrency lender,Genesis, a subsidiary ofDigital Currency Group, halted withdrawals on 16 November.[100] This halt causedGemini, an exchange owned by theWinklevoss twins, to cease allowing redemptions for clients using a service provided through a partnership with Genesis.[101] Another Digital Currency Group subsidiary, Grayscale, saw the value of its flagship offering, the publicly traded Grayscale Bitcoin Trust, decline by 20% over the two weeks preceding 17 November.[102] Grayscale Bitcoin Trust was trading at a discounted price, 42% below the value of its Bitcoin, as of 14 November.[103]
In 2023, Solana recovered, making it possible to pay people back. CEOJohn J. Ray III estimated that "customers and digital asset loan creditors will recover between 118% and 142% of their Petition Date claim values."[108]
Any left over money would normally go to stakeholders (of which SBF is the largest), but the IRS and the SEC also have "somewhat hazy claims", which take priority.[108]
On 21 December 2022, both Caroline Ellison (former CEO of Alameda) and Gary Wang (former Chief Technology Officer of FTX) pled guilty to fraud and other charges and were cooperating with federal investigators in criminal case against Sam Bankman-Fried. In the signed agreements Ellison and Wang agreed to "cooperate fully" and "truthfully and completely disclose all information concerning all matters".[113] On 3 January 2023, Bankman-Fried pled not guilty to fraud and other charges.His trial began in October 2023.[114] On 2 November 2023, Bankman-Fried was found guilty of all charges.[17]
On 16 November 2022, the cryptocurrency brokerage service Genesis suspended withdrawals following FTX declaring bankruptcy, further affecting the industry. The cryptocurrency exchange companyGemini, owned byCameron andTyler Winklevoss, announced that it would be pausing withdrawals on its Earn program, which uses Genesis as a lending partner.[115]
The exchange token ofCrypto.com, Cronos, lost approximately $1 billion in value in November.[116] On 14 November, Crypto.com's CEO assured users that the exchange was functioning as normal.[116] Commenters and customers remained fearful that Crypto.com could experience a collapse similar to FTX.[117]
BlockFi, a cryptocurrency lender, was reportedly taking steps to file for bankruptcy as of 15 November, having earlier halted withdrawals.[99] The company disclosed "significant exposure" to FTX on 14 November.[99] Another cryptocurrency lender, Genesis, a subsidiary ofDigital Currency Group, halted withdrawals on 16 November.[127] This halt causedGemini to cease allowing redemptions for clients using a service provided through a partnership with Genesis.[128] BlockFi confirmed speculation by filing forChapter 11 bankruptcy protection in the United States on 28 November.[129]
Cryptocurrency investment firms with assets still held on FTX after its bankruptcy include Galois Capital and Galaxy Digital.[130] Several public figures also invested in FTX or received compensation for promoting the company.[131] These include former coupleTom Brady andGisele Bündchen, as well asShaquille O'Neal,Stephen Curry, andKevin O'Leary.[131] According to anonymous sources cited byThe Information, some venture capital firms are considering lawsuits against Bankman-Fried.[132]
Jim Chanos predicted the collapse of FTX would lead to increased scrutiny and regulation of cryptocurrencies. Chanos further criticized the cryptocurrency sector as "designed to extract fees from really unsuspecting investors".[134]Richard Handler, CEO of American financial firmJefferies Group, tweeted on 10 November that he had attempted to meet with Bankman-Fried in July and again in September as he perceived he was "in over his head".[135] Handler stated that Bankman-Fried did not respond to the emails sent from Jefferies staff sent on Handler's behalf.[135] The sudden collapse of FTX has been compared tothe bankruptcy of Lehman Brothers by writers in publications includingThe New York Times and theFinancial Times, with some deeming FTX's collapse as "crypto's Lehman moment".[136][137]Lawrence Summers acknowledged the comparisons to Lehman and further compared the collapse tothe Enron scandal, caused by fraud perpetrated byEnron executives.[138]Rostin Behnam, the Chairman of theCommodity Futures Trading Commission, called for Congress to grant the organization more power to regulate cryptocurrencies.[139] Risk management firm Titan Grey published a primer on the commencement and early motions practice of the FTX chapter 11 case, analyzing issues such as creditor privacy, relief from the automatic stay, proposed differential treatment of customers from other creditors, and others.[140]
In July 2023, it was announced thatT.J. Miller would star as “a character inspired by Bankman-Fried” inFortun3, “an interactive series … inspired by the collapse of FTX.”[141]
The FTX collapse resulted in scrutiny of and a loss of funding for theeffective altruism movement, which Bankman-Fried had funded using profits from FTX.[142] Several leaders of the EA movement, includingWilliam MacAskill andRobert Wiblin,[143] have condemned FTX's actions.[144]
Prior to the collapse, Bankman-Fried and other senior leaders of FTX and Alameda were altogether worth approximately $16.5 billion, making them the second-largest group of benefactors to the EA movement afterOpen Philanthropy andGood Ventures.[145] On 10 November, the team running the FTX Future Fund, a charitable group bankrolled by Bankman-Fried, announced that they had resigned earlier that day.[73] Future Fund had committed $160 million in charitable grants and investments by 1 September of that year.[74]
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^Sorkin, Andrew Ross; Mattu, Ravi; Warner, Bernhard; Kessler, Sarah; Gandel, Stephen; de la Merced, Michael J.; Hirsch, Lauren; Livni, Ephrat (10 November 2022)."A Reckoning Awaits FTX".The New York Times.Archived from the original on 10 November 2022. Retrieved10 November 2022.
^Ashworth, Louis; Elder, Bryce (10 November 2022)."Watching tether wither, together".The Financial Times.Archived from the original on 10 November 2022. Retrieved10 November 2022.
^Ross Sorkin, Andrew; Mattu, Ravi; Warner, Bernhard; Kessler, Sarah; Gandel, Stephen; J. de la Merced, Michael; Hirsch, Lauren; Livni, Ephrat (17 November 2022)."Investor Losses from FTX's Implosion Are Growing".The New York Times.Archived from the original on 17 November 2022. Retrieved17 November 2022.
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