What Happened With FTX And What Does It Mean?

December 26, 2022
Written By:
Written By:
December 26, 2022

If you, in any way, shape or form, have been in contact with anything remotely crypto-related in the past couple of months, you will have unavoidably come across the FTX scandal. The whole ordeal has only gotten exponentially worse since pardon our language, shit hit the fan in early November. With the gravity and magnitude of the damage and implications revealing themselves to be significantly worse than anyone could have anticipated. Since November the account of what truly went down has shocked the crypto-community to the core. While it can all seem a little complicated if you’re not well-versed in financial and crypto-terms it boils down to one thing: Fraud. 

Here’s what you need to know. Let’s start with the basics, shall we?

What is FTX?

FTX is a, now bankrupt, cryptocurrency exchange. A business that allowed people to trade cryptocurrencies for other assets, be that other digital currencies or actual money. FTX was the second cryptocurrency exchange before its demise, just behind Binance, and ahead of Coinbase. 

Is FTX a cryptocurrency then?

Not exactly. FTX is the cryptocurrency exchange, FTX’s token is called FTT. FTT is the cryptocurrency, the token. However, some people have been known to use the terms FTX and FTT interchangeably, which is confusing. To us at least. 

How did FTX begin?

FTX was founded in 2019 by 27-year-old MIT graduate Sam Bankman-Fried, known in the crypto world as SBF. The California native entrepreneur grew one of the most, apparently, successful crypto-businesses in just a couple of years. Bankman-Fried was even considered a crypto-hero after coming to the rescue of TerraUSD, a cryptocurrency that crashed hard in May. Funnily enough, SBF is now being accused of manipulating the market and actually causing said crash. 

Source: IFLR

What happened to FTX? 

The beginning of the end for FTX was shed light on November 2nd by CoinDesk which questioned FTX’s solvency. But the foundations for FTX’s demise were laid from the beginning, CoinDesk merely pointed it out. Basically, FTX was built on a house of cards, and Alameda Research was the first card to fall. FTT on the other part was the first card to be laid. For the record, Alameda Research was a crypto-hedge fund created, also by SBF, to provide liquidity to FTX.

FTX was a Ponzi scheme

FTT was revealed to be a Ponzi scheme, SBF even bragged about it in a podcast. Like WTF? FTX was a Ponzi scheme which SBF then used to buy billions in collateral which he then couldn’t pay back. What he did do with that real-life money was buy sinking ships. Companies that were failing massively to sweep in, “save them” and add them to his crypto empire.

When people bought from FTX they thought they were buying crypto, when in fact they were buying an IOU. What is an IOU? It’s an informal acknowledgement of debt but it’s not an actual purchase. So when someone wanted to withdraw money, FTX would simply move around client money. It usually works as long as IOU holders don’t all decide to cash in their debt at the same time. However, clients and investors weren’t aware of this, since the lenient and lax regulations for crypto allowed for quite the opacity in the way it worked. Trusting SBF’s words, which turned out to be lies.

When Alameda Research was unmasked, the domino fall began

When Coindesk pointed out that Alameda Research’s balance sheet was mostly dependent on the asset of ‘unlocked FTT’ ($14.6 billion) and ‘FTT collateral’ ($2.16 billion) it was clear that Alameda and Research and FTX did not operate as separate entities, meaning Alameda Research was completely vulnerable in the face of FTT volatility. 

When news broke out, Binance, who owned a sizeable portion of FTX holdings, initially offered to bail out FTX. However, after investigating the company further they must’ve found quite a few irregularities because they parted ways with FTX instead and liquidated all the FTT they owned. People began to follow suit, trying to liquidate their money and leave FTX. It immediately became apparent that FTX could not pay people their money, because there was no money so to speak of. 

FTX declared bankruptcy after being unable to meet around $8 billion in customer withdrawal requests. 

Where did all the FTX money go?

The 32 billion dollars he amassed in years seem to have vanished into thin air. But how is this possible? Well, Sam Bankman-Freid would use investor money and clients’ money to carry out his own activities. He fooled everyone into believing that FTX was immensely profitable and that it did not use client assets to invest and that it had enough money to cover all client holdings. But nothing was further from the truth, he misappropriated billions here and there, left, right, and centre. Trying to save his family’s hedge fund, Superbowl commercial, countless properties in the Bahamas, contributions to political parties… The list goes on and on. 

Where is SBF now?

For these past two months, people could not believe that SBF was walking free, even being invited to interviews after all this news broke out. It seemed preposterous. Last week, however, he was finally arrested in the Bahamas and taken to the US to face court for orchestrating one of the biggest frauds in US history. 

What does all of this mean for crypto?

Unfortunately, the backlash of the FTX Scandal has reverberated all throughout the cryptocurrency world. Many crypto-sceptics have taken this as an opportunity to have their “I told you so” moment. The lack of regulations in crypto and its astronomically exacerbated growth are precisely what have allowed something like this to happen. The venture grew significantly faster than the infrastructure around it, and instead of nurturing and caring for it, ensuring it was being built in a sustainable, efficient manner, SBF did the complete opposite. 

Source: Photo by Ant Rozetsky on Unsplash

Many worries that the crypto world is now in danger, at risk of becoming highly regulated. But isn’t this what happened to the traditional financial industry too? People took advantage of it, ruined the system for everyone and so harder regulations were put in place after the 2008 financial crisis in order to protect investor assets and limit the risk banks and other firms could take.  

Clearly, there is an element of regulation that might have helped avoid all of this, but many of the crimes committed by SBF were actually possible due to holes in the actual system. While outside of the crypto-world companies are forced to be a hell of a lot more transparent, Fraud is widespread, and bribing politicians is ridiculously common, as are Ponzi schemes. 

Do we need harsher crypto regulations?

Sure it would be lovely to believe that we don’t need regulations, but we can’t seem to trust ourselves. Time and time again we prove that we can’t trust a society where greed is rampant, and bad apples can cause the demise of a system others have worked hard to build and protect. Are harsh regulations our only hope?

It just seems like we have our priorities all wrong. Something that could be a beautiful use of technology fostering community and innovation was turned into a quick buck scheme to exploit and throw away. Clearly, we should start catching on earlier by now that if someone’s becoming a billionaire overnight, someone else is getting screwed. 

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