One of the most prominent corporate bankruptcies in recent history. FTX was a leading centralized cryptocurrency exchange founded in 2019 by Sam Bankman-Fried. The company specialized in derivatives and leveraged trading products, allowing it to achieve a valuation of $32 billion USD in 2021, just three years after the company was founded. Sam Bankman-Fried, who also goes by the name SBF, is a Massachusetts Institute of Technology (MIT) graduate who worked at Jane Street Capital as an ETF trader in his early 20s. FTX offered a range of products related to crypto trading, including options, derivatives, leveraged tokens, and volatility products. With over 300 cryptocurrency trading pairs, the company was a one-stop shop for small and large investors alike wanting to get involved in the crypto space.
The company collapsed in November 2022 after a prolonged crypto bear market that started in 2021. People are comparing the collapse to that of Enron’s in 2001, and the 30-year-old founder is currently in custody, facing upwards of 115 years in prison if convicted of all eight charges laid upon him. So, why did the exchange collapse?
FTX collapsed primarily due to poor risk management, exposed by a decrease in the broader price of cryptocurrencies. It all started when Coindesk, a crypto-focused digital media website, revealed the balance sheet of Alameda Research (a crypto-investing firm owned by SBF). The balance sheet showed a vast amount of the firm’s assets as being held in a digital currency created by FTX called FTT. In simple terms, Alameda’s assets were held in FTT, so if that coin fell below a certain market value, Alameda would be at risk of insolvency, and would be unable to pay back the loans it had taken out.
This ties back to FTX because the platform lent out a large portion of customer assets to Alameda Research. So, when the price of FTT fell violently on November 7th, the ripple effect began. The final dagger was a series of mass withdrawals that occurred in the days to follow. Since FTX had lent out most customer assets and was unable to get those assets back, FTX became insolvent as a result and had to suspend withdrawals.
On November 11, 2022, FTX filed for Chapter 11 bankruptcy protection; 300 jobs lost, $50 billion in customer assets locked, and an SEC investigation into FTX and Sam Bankman-Fried.
Anyone who held money on FTX throughout the incident is currently unable to withdraw. It is reported that those who are most likely to suffer from this are the small investors who held their savings on the platform and may lose everything as a result.
The bankruptcy is a clear reminder of the importance of proper risk management. FTX’s newly appointed CEO, John Ray III, said that failure of corporate control caused the collapse, some of the worst he’s seen in over 40 years of handling bankruptcy cases. He discussed how FTX’s operations were very concentrated in a “very small group of grossly inexperienced and unsophisticated individuals” who failed to recognize the duty that comes with holding other people’s money.
Importantly, the bankruptcy of crypto conglomerate FTX had nothing to do with the fundamentals of crypto and blockchain technology but instead with poor decision-making by the higher-ups at the company. SBF’s conviction, and more importantly, the severity of the charges laid upon will largely depend on whether this was done with malicious intent or simple ignorance, present in the egotistical 30-year-old running the $32 billion enterprise.