FTX Goes Bankrupt: The History Of The Fall Of One Of The Largest Crypto Exchanges In The World
The fall of FTX adds to the long list of crypto players that have exacerbated crypto winters.
2022 is considered to be the era of crypto winters by some experts and influencers in the industry. Indeed, this time of year, there have been several downfalls of crypto companies. For example, Terra Luna, Celsius, and Voyager. Last month, FTX declared bankruptcy. In fact, FTX was once one of the largest crypto exchanges in the world, with a company valuation of US$32 billion.
Following is the history of FTX, from when the company was founded until it went bankrupt.
Early History of FTX
FTX is a centralized cryptocurrency exchange founded in 2019 by Sam Bankman-Fried and Gary Wang. Bankman-Fried is a graduate of MIT and also a former trader on Wall Street. While Wang had worked at Google. As of July 2021, FTX is the third largest cryptocurrency exchange in the world. Some of the products that FTX offers include derivatives, token leverage, and volatility.
Officially, FTX was formed as a company in Antigua and Barbuda, an island nation located in the Caribbean Sea. In September 2021, they moved their main office from Hong Kong to the Bahamas. Meanwhile, one of their subsidiaries, FTX Digital Markets Ltd. regulated by the Securities Commission of the Bahamas. This exchange does not offer services to United States residents.
However, crypto traders from the United States can use the services of FTX US, a financial services business registered with the Financial Crime Enforcement Network aka FinCEN. As of October 2021, FTX US has completed its acquisition of LedgerX. They also changed their name to FTX US Derivatives.
FTX itself received an investment of US$ 900 million in July 2021. That way, FTX’s valuation as a company reaches US$ 18 billion. A few months later, in September 2021, FTX signed a sponsorship contract with the Mercedes-owned Formula 1 team. In October 2021, FTX again received funding. Two investors investing in this cryptocurrency exchange include Temasek and Tiger Global. FTX’s valuation has also increased to US$25 billion.
After obtaining an investment of US$400 million, FTX US has a valuation of US$8 billion, as of January 27, 2022. This investment was provided by some of FTX’s early investors, such as SoftBank Group and Temasek. Meanwhile, as of January 31, FTX had a valuation of US$32 billion, having raised US$400 million in funding, according to a Reuters report.
On June 4, 2022, FTX signed a sponsorship contract with the Miami Heat basketball team. Reportedly, to attach the name FTX to the basketball team’s headquarters, this crypto exchange paid US $ 135 million. It didn’t stop there, in early July 2022, FTX offered a US$400 million revolving credit facility for BlockFi. At that time, BlockFi was indeed experiencing problems. Alongside the recurring credit offer, FTX also entered into an agreement with an option to purchase BlockFi.
In the same month, FTX also offered a partial bailout for a crypto lending service, Voyager Digital. However, Voyager thinks FTX’s bid is lower than it should be. In August 2022, the bank regulator in the United States ordered FTX to stop making claims that the company’s funds are protected by the government. Because, it is a false claim that can mislead FTX customers.
When compared to other cryptocurrency exchanges, one of the advantages of FTX is its easy-to-use mobile and desktop applications. Apart from that, they also offer a wide range of products. As a result, crypto investors — ranging from beginners to professionals — are also interested in using FTX services, according to an Investopedia report.
FTX fallout
Apart from FTX, Bankman-Fried also founded a crypto hedge fund, called Alameda Research. FTX and Alameda have a close relationship. And this is one of the reasons behind the fall of FTX. On November 2, 2022, crypto news site, CoinDesk, reported that most of Alameda’s assets are in the form of FTT, a token made by FTX which functions to provide discounts when owners want to make crypto transactions.
Exchanging FTT for money is not easy. For this reason, the report from CoinDesk raises concerns that the capital reserves owned by Alameda Research and also FTX have been running low, as stated by ABC News.
Responding to an article from CoinDesk, CEO of Binance, Changpeng Zhao alias CZ revealed, he will sell all of the company’s shares in the form of FTT. In total, the value of the shares reached US $ 580 million. CZ’s decision made other FTT owners worry. Finally, many FTT owners are also selling their tokens. This trend is causing problems for FTX as they do not have enough funds to cash out all the FTT tokens that users want to sell. They also decided to prohibit users from exchanging their tokens.
Less than 1 week since the CoinDesk article was released, on November 8, 2022, FTX entered into negotiations with Binance, prompting their rival to buy FTX. The reason is, Binance is considered to have a role behind the fall of FTX. Indeed, CZ’s decision to sell shares in FTT was the catalyst that prompted FTX customers to sell FTT tokens.
Bankman-Fried also expressed his confidence in CZ’s abilities. He felt that if Binance bought FTX, CZ would be able to continue to build a global crypto ecosystem. He also emphasized that the most important thing is that FTX customers will remain protected.
Profit cannot be achieved, misfortune cannot be denied. Binance canceled their plans to buy FTX. In an official statement, Binance explained, they made the decision after they heard about an investigation by US regulators as well as news about how FTX misappropriated consumer funds. At the same time, the Securities and Exchange Commission (SEC) and the Justice Department have begun investigating the FTX collapse.
Sequoia Capital, one of the leading venture companies, considers its US$210 million stake in FTX to be worthless. In an open letter, they said that the losses they get are part of the risk in investing.
On November 10, 2022, financial regulators in the Bahamas froze FTX’s assets. The Securities Commission of the Bahamas also said it was aware of the possibility that funds belonging to FTX customers were misappropriated. One day later, on November 11, 2022, FTX declared that the company had filed for bankruptcy. They also apply for protection of the assets they still have.
At the same time, Bankman-Fried stepped down as CEO. He was replaced by John J. Ray III, who had led Enron when the company went bankrupt in the 2000s. Ray said FTX’s decision to declare bankruptcy in order to protect their remaining assets was an important step in being able to recover stakeholder funds.
The crash of the FTX crypto exchange prompted prosecutors in New York to launch an investigation. What prosecutors want to investigate is whether FTX violated securities regulations when they allegedly provided funds belonging to their customers to Alameda Research. On November 16, 2022, Bankman-Fried and executives at Alameda and Binance were summoned to appear in court on Capitol Hill.
California Representative Maxine Waters said, “The FTX crash has cost over a million users. However, most FTX users are ordinary people who used their savings to invest in the crypto exchange. Now, they must be willing to see their hard earned money. just disappeared.”
Meanwhile, several celebrities who support FTX, such as Naomi Osaka, Shaquille O’Neal, and Kevil O’Leary, have had to face prosecution. Because, they are considered to promote fraudulent products to investors who do not have sufficient information.
