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.