DECODING THE FTX DEBACLE

By- Maulika Desai (Columnist)

In the unpredictable domain of crypto, it is not entirely impossible for a multibillionaire to lose his entire fortune over a weekend. This is exactly what happened to the CEO of FTX, Sam Bankman Fried, a man with lofty philanthropic goals. His cryptocurrency exchange’s value plummeted from $32 billion to bankruptcy. The rise and fall of FTX revealed holes in the crypto space that the industry peers, the media and government officials conveniently chose to overlook.

All was well for FTX before the crash. It was the brainchild of Sam Bankman Fried (SBF), who was the crypto saviour earlier this year when arithmetic stablecoin Terra and Luna collapsed in May. SBF founded the quantitative research firm Alameda Research in 2017, followed by FTX in 2019. FTX, a digital currency exchange, is a platform where people could buy and sell digital assets. Through a series of high-profile acquisitions, aggressive marketing tactics, and inexpensive trading costs, the business quickly built an international reputation. It was backed by major venture groups and endorsed by several prominent personalities.

However, things took a sharp downturn from November 2. CoinDesk, a crypto-focused digital media website, published a report based on Alameda Research’s balance sheet. The leaked data revealed that Alameda held over 14 billion dollars’ worth of the digital currency created by FTX called FTT. This seemed suspicious to investors so they began withdrawing their money frantically. Alameda’s CEO Caroline and other officials claimed that everything was under control and the company was doing well. Yet, the market was not convinced and the FTT token lost over 70% of its wealth in just 72 hours.

On November 6, FTX’s biggest rival, Binance, decided to offload all its FTT tokens. With the largest crypto exchange losing faith in FTX, the price of the FTT token crashed. On November 8, FTX broke its silence on its severe financial crisis and it stopped letting customers take money out of the platform. Binance offered to bail out FTX a day later but quickly backed out of the non-binding transaction. The crypto community was on the edge, though the nature of linkages between Alameda and FTX was still unknown.

Soon enough, the façade came to light. FTX was using billions of customer funds to make risky bets at Alameda Research. Amidst the frenzy in the unregulated crypto market, Sam Bankman-Fried had to step down as the CEO of FTX. On November 11, both the companies he oversaw filed for Chapter 11 bankruptcy. This disgraceful debacle has been the largest crypto-related bankruptcy ever filed. Unethical bookkeeping backdoors seem to have been used to alter the firm’s financial records.

Another twist ensued soon after. On November 12, FTX announced that it detected unauthorized access and millions of dollars had been moved from the platform suspiciously. Speculation about the whereabouts of Bankman-Fried started taking rounds when the Bahamian police sought investigations. The company's headquarters are in the Bahamas, where Bankman-Fried also lives. To add to the mess, politicians got involved, especially the Democrats who were under pressure, given that Bankman-Fried was a mega-donor to the party. A demographic dilemma arose in the legal proceedings, whether to investigate in the Bahamas or the States.

FTX took unusually long to file “first-day” papers indicating its debts and how it became bankrupt. The reason for that delay was apparent when FTX’s new CEO, John Ray, described the “unprecedented” chaos at the company in court filings on November 17. Ray claimed to have never seen such a complete failure of corporate controls in his career, not even during the Enron scandal of 2001. He further revealed that corporate funds of FTX were used to purchase homes and other personal items for employees and advisors. A handful of Bankman Fried’s close associates funneled millions of funds to buy Bahamas luxury real estate. His parents also purchased plush properties in the Bahamas. FTX’s employees rushed for the exits when such shocking facts came to light.

After criminal investigations in the Bahamas, the Crypto King was arrested by its authorities at the request of the U.S. government to indict him on eight criminal charges. In the pre-written testimony before the US House of Representatives, SBF expressed shame, sorrow and regret for his actions. He blamed a long list of individuals for the fall of his company, including the new CEO John Ray who refused to communicate with him and Binance’s cofounder Changpeng Zhao who pulled out of a non-obligatory deal. Mr. Bankman-Fried also alleged that he was pressurized by the law firm Sullivan & Cromwell and Ryne Miller, the general counsel of FTX US, to file for bankruptcy by signing the Chapter 11 documents. Nervous over conflicting interests, SBF claimed to have distanced himself from Alameda’s operations to focus on FTX, thereby unaware of the former’s inconsistencies. On January 3, he appeared in a New York courtroom and pleaded not guilty to every charge against him.

With over 100 affiliated companies affected, 370 million dollars worth of crypto funds missing and frustrated investors uncertain of getting back any of their money, FTX has rightly been accused of sending a severe ripple effect across crypto markets. The large crypto exchange Gemini is unable to return customer funds as it had funds in Genesis Trading, which had funds in FTX. Regulations were bound to enter the crypto space, but after the FTX upheaval, they will come in quickly. The industry needs to step up and regulate itself as lawmakers worldwide have proven to be sluggish in enacting guidelines.