Founder and former CEO of the FTX crypto exchange, Sam Bankman-Fried (SBF) pleaded not guilty to all eight accounts of U.S. criminal charges. Just last month, a U.S. judge released SBF on a $250 million bail bond.
If you’ve been involved in the cryptocurrency space for a while, you know it’s not without its drama. Similar to traditional markets, there are crypto investing risks.
The SBF/FTX collapse takes things to a whole new level.
This post explains how the FTX failure came about. As the story unfolds, the rabbit hole goes deeper. Enjoy reading one of the wildest stories in crypto’s history.
FTX Crypto Exchange
Before we dive into the FTX collapse with founder and former CEO Sam Bankman-Fried aka SBF, let’s first discuss what FTX is exactly and lay the groundwork.
FTX is a crypto exchange based in the Bahamas. Cryptocurrency exchanges like FTX facilitate people to buy, sell, hold, and trade crypto.
The FTX crypto exchange had a ton of sponsorships and celebrity endorsements in its heyday. For example, the Miami Heat’s arena was coined the FTX Arena.
Celebrity endorsements included the likes of “the G.O.A.T.” himself Tom Brady and his now ex-wife Gisele Bündchen. Other star athletes included Stephen Curry, Naomi Osaka, etc.
Rewinding a Bit
Before the FTX collapse, the cryptocurrency industry at large had its fair share of bumps in the road.
First of all, the economy this year was rocky. Coupled with this was the fall of the Terra protocol. The Terra protocol was behind its stablecoin TerraUSD and token Luna. This set off a chain reaction in the crypto industry where other firms went under in 2022.
Other crypto companies and exchanges such as Three Arrows Capital, Celsius, and Voyager Digital all filed for bankruptcy over the summer. SBF even offered to assist and bail out these struggling companies. The “crypto winter” was upon us.
A Turn for the Worse
CoinDesk published an alarming report about Alameda Research, which was also owned by SBF.
FTX’s native token is FTT. Alameda Research relied heavily on FTT and it made up the majority of the trading firm’s balance sheet.
Since the two companies were tied at the hip, there was cause for concern over manipulation. There was also a concern about artificially inflating the FTT token.
Binance and FTX
Binance is one of the most well-known crypto exchanges today. The CEO of Binance, Changpeng Zhao aka CZ, publicly announced via Twitter his plans to sell Binance’s FTT holdings. This of course caused a scare among investors to withdraw their holdings from the FTX crypto exchange.
Now many more people realize the importance of investing securely by holding your keys.
This resulted in the FTX crypto exchange not being able to afford the enormous amount of customer withdrawals. As you might imagine, the native token FTT tanked in value.
Binance intended to buy FTX on Nov. 8th but then backed out a day later. They stated that the FTX crypto exchange was beyond its “control or ability to help.”
Filing for Bankruptcy
On November 11th, FTX and Alameda Research filed for Chapter 11 bankruptcy. Sam Bankman-Fried also stepped down as CEO.
The bankruptcy highlighted issues within the FTX crypto exchange such as not verifying the number of users and not possessing an accurate list of bank accounts and account signatories.
Poor record keeping from the firm also came to light via a former employee. There were dozens of employees who quit over risk management concerns and business ethics.
FTX’s new CEO would be John J. Ray III (he stepped in when Enron fell apart).
SBF’s Response
How did SBF respond to the FTX collapse? Initially, he told Crypto Twitter that he “fucked up.” He then posted a series of single-letter tweets that spelled out “what happened.”
What followed was a thread explaining that “FTX was handling ~10b/day of volume and billions of transfers.” He then stated that “But there was too much leverage—more than I realized. A run on the bank and market crash exhausted liquidity.”
One result of this was that FTX’s collateral went from $60 billion to $9 billion.
Hopefully, this teaches everyone how to better access their cryptocurrency risk management.
The Thief
With all this going on, there was even a thief in the mix. Someone stole $477 million from the FTX crypto exchange.
No one knows who laundered the money, but some speculate it was someone within the company.
SBF’s Future
As far as what SBF’s future is right now, it’s unclear. We do know that his net worth fell by 94%, from $16 billion to $1 billion. SBF states in an interview recently that he only has $100,000 left in his bank account.
SBF faces trial on eight criminal charges on Oct. 2. A court hearing was held on Dec. 22, 2022, where a federal judge decided to release SBF from custody. SBF’s attorneys and federal prosecutors agreed to a $250 million bond.
He will live in Palo Alto, CA with his parents, wearing an electronic monitoring bracelet.
SBF pleaded not guilty to all criminal charges on Jan. 3, 2023, in federal court in New York.
Crypto’s Future
Even though the SBF/FTX crypto fiasco painted the cryptocurrency market in a negative light, there is something we can learn from it. The silver lining is to not trust, but verify.
Sometimes we have to learn things the hard way. Now more people than ever realize leaving crypto on an exchange is a bad idea. In the end, people will be people (greed and all).
Thankfully, FDAR is here to assist with research and educating the crypto community. Let us help you with your crypto risk management. Be sure to contact us at your nearest convenience.