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How FTX went from crypto giant to bankrupt and under investigation

Nov 11, 2022


Embattled cryptocurrency exchange FTX filed for bankruptcy protection Friday after a week of catastrophic hits to the platform. The company also announced that Founder and Chief Executive Officer Sam Bankman-Fried, known as SBF, is stepping down.

The collapse of FTX this week has rippled through the entire cryptocurrency realm, tanking coin values. Bitcoin’s value dropped below $16,000 this week, a low not seen since November 2020.

“The immediate relief of Chapter 11 is appropriate to provide the FTX Group the opportunity to assess its situation and develop a process to maximize recoveries for stakeholders,” said FTX Group’s new CEO, John J. Ray III.

Ray is a lawyer and corporate restructuring expert who oversaw the Enron liquidation after its 2001 collapse.

How it started

Just last week, FTX was a giant in the industry. But a leaked document obtained by CoinDesk exposed blurred financial lines between two of SBF’s companies: the exchange, FTX and the trading firm, Alameda Research. The Nov. 2 report revealed that a large chunk of the $14.6 billion in assets on Alameda’s balance sheet was in FTT, a token created by FTX.

“While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto. The situation adds to evidence that the ties between FTX and Alameda are unusually close,” CoinDesk reported.

The unraveling

Following the CoinDesk report, the CEO of Binance announced plans to liquidate FTT “due to recent revelations.” Changpeng Zhao, known as CZ, said the move was a “post-exit risk management, learning from LUNA.” But his actions triggered a run on deposits as clients overwhelmed FTX with withdrawal requests.

Then, it appeared Binance would come to the rescue of FTX, agreeing to fully acquire the group to help with its liquidity crunch. But the deal quickly fell through when Binance said things that came up during corporate due diligence discouraged them from acquiring the company.

The probes

This week, it came to light that the Securities and Exchange Commission is investigating FTX’s handling of customer funds and crypto-lending activities, according to Reuters. The Commodity Futures Trading Commission and Department of Justice are also looking into the issue, and the California Department of Financial Protection and Innovation announced its own lawsuit late Thursday.

Agencies are looking into the relationship between SBF’s two companies, FTX and Alameda Research, to see if FTX misused customer funds to prop up its sister company.

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