The unprecedented collapse of what had fast developed into arguably the world’s most popular crypto exchange has dominated international headlines over the last week. Bahamas-based FTX, once a spectacle of the power of the cryptocurrency market with a valuation of upwards of $32 billion as of just January – ultimately floundered due to a number of long-standing issues that had been hidden from investors and employees alike. While pulled endorsements from millionaire celebrity investors continue to roll in, billions upon billions of dollars have collectively been lost or unaccounted for in wake of the firm’s Chapter 11 bankruptcy declaration; this as FTX’s embattled founder and CEO Sam Bankman-Fried (otherwise known as SBF), once a rising star in the crypto world, remains on the run. The 30-year-old entrepreneur was once widely viewed as something of a renaissance man, a pioneer that would help steer the greater crypto sphere towards international adoption and use across all aspects of daily life. Sadly, it now appears however that the crypto mogul is nothing more than a con-man.

            When viewed from a historical perspective, the fall of FTX can only be compared to the crumbling of Enron in the early-2000’s. Much the same as the dissolving of the aforementioned Wall Street darling would draw down the greater U.S. stock market, the collapse of FTX has subsequently plunged the entire crypto industry into a state of chaos. The ongoing scandal has already contributed to the global cryptocurrency market falling by about two-thirds from its peak to $1.07 trillion.¹ The umbrella phrase “liquidity issues” has been heavily utilized by company representatives from both FTX and its sister firm, Alameda Research, over the last week with respect to the company’s collapse. In truth, the company had a number of significant problems that were largely hidden by SBF as he misled both employees and investors time and time again since the firm’s launch in 2019. All told, the company’s widespread financial issues came to the forefront of the discussion over the past several weeks as part of a highly publicized (specifically amongst the social media masses) sell-off of FTX’s native crypto token, FTT. FTX is unique in that owners of FTT could use the token to obtain discounts on the platform’s trading fees or for staking to earn income from their holdings. However the way in which the unregulated token was used to support FTX left the company – as well as Alameda – heavily exposed to volatility.⁴ Forbes writes that as of June 30, the single biggest asset on Alameda’s $14.6 billion balance sheet was “unlocked FTT,” while the third biggest asset on the books was a $2.16 billion pile of “FTT collateral.”⁴

            The above-mentioned sell-off came in response to a tweet from CEO Changpeng “CZ” Zhao of rival crypto-firm Binance in which he detailed his company’s decision to liquidate any remaining FTT on their books. Binance, the world’s largest cryptocurrency exchange, initially made a considerable investment in FTX with a 20% ownership purchase with the shared goal of bolstering the emerging crypto industry. Zhao’s decision was reportedly reached after information about Alameda’s disastrous financials leaked to the public via a balance sheet acquired by journalists at CoinDesk. Also contributing to the run on FTT and the exodus from FTX were allegations of various improprieties by SBF and other company executives with respect to the mishandling of customer funds and potential U.S. government investigations into the firm’s suspicious business practices. Investors have also simply continued to pull away from riskier assets in the wake of rising interest rates and the ongoing economic issues plaguing the United States. All told, FTT was essentially rendered valueless over just a few short days and billions of dollars worth of net withdrawals from FTX poured in over the first week of November.

            Realizing his empire was crumbling, SBF ultimately attempted to save his company from its impending demise with an attempted sale of the firm to none other than Zhao and Binance – a shocking reversal on a practice that FTX had effectively mastered months earlier in throwing lifelines to other faltering cryptocurrency platforms. This includes a now infamous $500 million loan agreement reached with failed crypto brokerage Voyager and an additional $250 million in revolving credit provided to crypto lender BlockFi over the summer. To cover their losses in these instances, FTX was found to have used customer deposits of indeterminate value. With all of the negative details emerging about FTX, Zhao ultimately drew the final blow against his counterpart by withdrawing a potential bailout offer just hours after levying it when it became clear that FTX would implode if not rescued by his firm.

            A few days after said deal failed, news organizations began discovering even more skeletons in SBF’s closet. It turns out that billions of dollars that were sent to Alameda by FTX to keep them afloat were then redirected to the personal accounts of Bankman-Fried and his inner circle. A reported total of $1 billion went to SBF himself with an additional $2.3 billion going to another entity he directly controls, while another whopping $1.7 billion was collectively routed to several of his cronies.² With more information about FTX funds being transferred directly to the accounts of its CEO, many have begun to wonder if FTX was anything more than an elaborate Ponzi scheme from the very beginning. Those part of an $11 billion class-action lawsuit against FTX certainly think so. This past week it was announced that several of the high-profile celebrities and athletes that were once a major part of FTX’s marketing campaign are headlining this lawsuit as well. The suit names Sam Bankman-Fried, Tom Brady, Gisele Bündchen, Stephen Curry, Golden State Warriors, Shaquille O’Neal, Udonis Haslem, David Ortiz, William Trevor Lawrence, Shohei Ohtani, Naomi Osaka, Lawrence Gene David, and Kevin O’Leary, and seeks to make them “responsible for the many billions of dollars in damages they caused Plaintiff and the Classes and to force Defendants to make them whole.”³

            “This was just a house of cards waiting to fall apart. Voyager crypto was just the same – it was a house of cards waiting to fall apart, so we’re going to prove that the people like Mark Cuban that told these investors ‘trust us, we’ve done our due diligence, we’ve checked it out, it’s safe investments,’ they were not telling the truth” said Adam Moskowitz, attorney on behalf of the case’s plaintiff Edwin Garrison. SBF’s troubles won’t stop in civil court either. FTX and SBF himself are under investigation by the United States government, as well as that of several other countries for possible securities violations and the illegal use of customer funds.

Global RADAR will continue to chronicle the fallout of the FTX scandal in the coming weeks.

Citations

1. Berwick, Angus, and Hannah Lang. “Crypto’s FTX CEO Looking at All Options as Binance Deal Collapses.” Reuters, Thomson Reuters, 10 Nov. 2022. 
2. Durot, Matt. “Sam Bankman-Fried and Three FTX Executives Received $4.1 Billion of Loans from Alameda Research: Where Did the Money Come from and Where Did It Go?” Forbes, Forbes Magazine, 19 Nov. 2022. 
3. Penley, Taylor. “Plaintiff, Attorney behind FTX Lawsuit Sound off on Crypto Empire’s ‘Fraud‘: ‘House of Cards Waiting to Fall’.” Fox News, FOX News Network, 17 Nov. 2022. 
4. Powell, Farran. “FTX Declares Bankruptcy.” Forbes, Forbes Magazine, 14 Nov. 2022.