Crypto exchange FTX has filed for bankruptcy amid cash crunch, reports of mishandled funds, and an estimated $1.7 billion of missing customer funds.
The collapse has seen the largest cryptocurrencies lose just over $150bn in market value.
Just last month, FTX was the world’s third-largest crypto exchange by trading volume.
These exchange platforms made the kind of sophisticated transactions used for stock trading available for cryptocurrencies.
After a loss in confidence in the platform, FTX has been unable to come up with the money to satisfy customer withdrawal requests and has now filed for bankruptcy.
FTX was owned by Sam Bankman-Fried, a 30-year-old now-former billionaire who has received fawning media attention over the past two years. He’s been covered under headlines such as “The next Warren Buffet?” by Fortune and been compared to JP Morgan during a CNBC interview.
Despite media coverage hailing him as “an uncannily sharp altruistic billionaire”, as Vox did, Bankman-Fried is now under suspicion of brazen fraud and the mishandling of funds.
Trouble began for FTX following a report on November 2, by Coindesk which suggested that a large portion of the assets underpinning trading firm Alameda Research, which is also owned by Bankman-Fried, was made up of FTT tokens.
FTT is a cryptocurrency invented and traded by FTX, whose value could be expected to track with the value of the company. Alameda Research’s balance sheet also included a large amount of loans using FTT as collateral.
All this suggested that Bankman-Fried’s empire was a risky house of cards built on top of a cryptocurrency that it had itself created. Changpeng Zhao, founder of competing crypto exchange platform Binance, then announced that he planned to sell off their considerable holdings of FTT citing “recent revelations”.
This sparked a run on FTX as investors attempted to sell FTT assets or withdraw their money from FTX over fears that Binance’s plans would crash the price of FTT.
This run from investors caused the value of FTT to collapse entirely as around $6 billion of assets were withdrawn from FTX over 72 hours. FTX was faced with a liquidity crunch, unable to come up with the funds to pay out customer withdrawals.
Binance announced that it would bail out FTX, but reversed its plans the following day citing reasons of corporate due diligence and hinting at reports of mishandled funds. With no bailout in sight, FTX filed for bankruptcy on November 11.
Three days later, Reuters reported $10bn of customer funds had been transferred from FTX to Alameda Research. Sources reported to Reuters that between $1bn and $2bn of these funds were now missing from Alameda’s records.
Sources from FTX’s own legal teams also reported that Bankman-Fried had implemented a “backdoor” which allowed him to alter company financial records without alerting internal staff or external auditors.
FTX and Alameda held large amounts of various cryptocurrencies, and had previously stepped in to bail out other exchanges amid falling crypto prices last year.
The collapse of FTX has seen crypto prices drop across the board, including a 20% decrease for big players Bitcoin and Ethereum. The world’s 15 largest cryptocurrencies lost just over $150bn in market value over two days.
IOL Tech