FTX Collapse

Bankruptcy

Cryptocurrency exchange FTX filed for Chapter 11 bankruptcy protection on Nov. 11, 2022 after a swift fall from grace. The company's valuation plunged from $32 billion to bankruptcy in a matter of days, dragging down founder and CEO Sam Bankman-Fried's $16 billion net worth to near-zero.

FTX's collapse shook the volatile crypto market, which lost billions in value, dropping below $1 trillion. The consequences of FTX's rapid decline and collapse will likely impact cryptocurrencies well into the future and could even drag down broader markets.

FTX's collapse took place over a 10-day period in Nov. 2022. The catalyst for the crisis was a Nov. 2 scoop by CoinDesk that revealed that Alameda Research, the quant trading firm also run by Bankman-Fried, held a position worth $5 billion in FTT, the native token of FTX. The report revealed that Alameda's investment foundation was also in FTT, the token that its sister company had invented, not a fiat currency or other cryptocurrency.6 That prompted concern across the cryptocurrency industry regarding Bankman-Fried's companies' undisclosed leverage and solvency.

BINANCE SAYS THEY WILL SELL FTT Tokens

Binance, the world's biggest crypto exchange, announced on Nov. 6 that it would sell its entire position in FTT tokens, roughly 23 million FTT tokens worth about $529 million. Binance CEO Changpeng "CZ" Zhao said the decision to liquidate the exchange's FTT position was based on risk management, following the collapse of the Terra (LUNA) crypto token earlier in 2022.

FTX LIQUIDITY CRISIS

By the next day, FTX was experiencing a liquidity crisis. Bankman-Fried attempted to reassure FTX investors that its assets were stable, but customers demanded withdrawals worth $6 billion in the days immediately following the CoinDesk report. Bankman-Fried searched for additional money from venture capitalists before turning to Binance. The value of FTT fell by 80% in two days.

On Nov. 8, Binance announced it had reached a non-binding agreement to buy the non-U.S. business of FTX for an undisclosed sum, effectively the world's largest cryptocurrency exchange bailing out its close rival.

BINANCE CANCELS BAILOUT

The promise of a rescue was shortlived as Binance backed out of the deal a day later. On Nov. 9, the exchange said that it would cancel the FTX deal after corporate due diligence raised concerns about the mishandling of customer funds, among other issues.

FTX ASSETS Frozen

On Nov. 10, the Bahamas securities regulator froze the assets of FTX Digital Markets, FTX's Bahamian subsidiary, following news that Bankman-Fried was seeking up to $8 billion in capital to bail out the exchange.

On the same day, the California Department of Financial Protection and Innovation announced that it had initiated an investigation of FTX.

Bankman-Fried apologized the same day for the liquidity crisis and admitted on Twitter that FTX's non-U.S. exchange had insufficient funds to meet customer demands. Bankman-Fried said that "poor internal labeling" caused FTX to miscalculate leverage and liquidity. In the same thread, he said Alameda would wind down trading.

Bankman-Fried Steps Down as CEO; FTX Files For Bankruptcy

Bankman-Fried stepped down on Nov. 11 as CEO of FTX, replaced by John J. Ray III, who led energy trading firm Enron through bankruptcy proceedings years before.16 FTX filed for Chapter 11 bankruptcy protection the same day, revealing that roughly 130 other affiliated companies were also part of the proceedings. The bankruptcy filings indicated that FTX had assets in the range of $10 billion to $50 billion and liabilities in the range of $10 billion to $50 billion as well.

Within hours of filing for bankruptcy, FTX said it was the victim of "unauthorized transactions" and that it would move its digital assets to cold storage for security purposes

Where did the money go?

The beleaguered crypto exchange FTX suffered a $400 million hack over the weekend, and at least one blockchain expert says the clues are point to a high-level insider who committed an amateur misstep that might have inadvertently revealed their identity.

The attacker appears to have “had access to all the cold wallet storages which he exploited,” Dyma Budorin, co-founder and chief executive of blockchain security auditing firm Hacken, said Monday in an interview with CoinDesk TV.

Hacken investigated blockchain transactions and found that the looter tried to send tether (USDT) stablecoin on the Tron blockchain multiple times unsuccessfully because they didn’t have enough TRX, the Tron network’s native token, in the wallet to pay for transaction fees. So the looter used their verified personal account on crypto exchange Kraken to send 500 TRX to the compromised wallet address to cover the transaction.

“He made a stupid mistake,” Budorin said.

Because of Kraken’s “know-your-customer” or KYC measures – part of the anti-money-laundering compliance requirements – and verification process, the exchange had information on who owns the personal wallet the TRX was sent from, revealing the identity behind the exploit.

Hacken immediately contacted Kraken’s security team about the transaction, Budorin said.

“We know the identity of the user,” Nick Percoco, chief security officer of crypto exchange Kraken, said in a tweet Saturday.

New details about the exploit led to speculation on crypto Twitter that possibly FTX owner Sam Bankman-Fried or someone in his close circle could have been behind the exploit, given the access to FTX's cold wallets.

Asked whether Bankman-Fried was the owner of the compromised wallet the exploit originated from, Budorin said that “this is confidential information,” but he added that the wallet’s owner is a U.S. citizen. Budorin did not return CoinDesk’s request for additional comment at publication time on how he obtained information about the hacker’s citizenship and whether Kraken shared any personal data with Hacken of the account’s holder.

A Kraken spokesperson said that the exchange is “in contact with law enforcement, and has frozen Kraken account access to certain funds we suspect to be associated with ‘fraud, negligence or misconduct’ related to FTX,” according to a statement sent in email.

On 11/17/2022 a tweet from Securities Commission of The Bahamas indicated they were responsible for the transfer.

Ripple Effect

BlockFI

In an official update sent to clients on Nov. 14, BlockFi admitted to having “significant exposure” to FTX and its affiliated companies but insisted it had “the necessary liquidity to explore all options.” The news came as somewhat of a surprise since on Nov. 8, BlockFi’s founder and chief operating officer, Flori Marquez, assured users in a Twitter thread that all BlockFi products were “fully operational” because it had a $400 million line of credit from FTX US, which is a separate entity from FTX, the global entity affected by the liquidity crunch.

SALT Lending

In the upcoming weeks, it may come as no surprise to learn that many more companies have been affected by FTX’s collapse. On Nov 15, Crypto lending platform SALT also disclosed that it would pause withdrawals and deposits to its platform “effective immediately” because “the collapse of FTX has impacted our business”, according to an email sent to its clients.

In an email captured in a tweet circulating online, the company shared, “Until we are able to determine the extent of this impact with specific details that we feel confident are factually accurate, we have paused deposits and withdrawals on the Salt platform immediately.”

Shawn Owen, the CEO of SALT, denied allegations that this is a signal his company was “going bust.” However, he stated, “We did not publish this as a notice of going bust. We are pausing to deal with the fall out of FTX and to confirm that non[e] of our counter parties have any additional risks so that we can proceed with maximum caution with all efforts directed at not going bust. More info soon.”

Liquid Global Exchange