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Almost exactly a year ago, FTX came crashing down to earth. At its peak, the cryptocurrency exchange was worth $32 billion and had high-profile investors like Sequoia Capital and BlackRock -- not to mention everyday investors who trusted FTX to hold their money.
On November 11, 2022, the company filed for bankruptcy. Within a year, FTX founder Sam Bankman-Fried was arrested, tried, and found guilty of seven counts of fraud and conspiracy. It turns out FTX customer money was secretly used to provide a $65 billion line of credit for Alameda Research, a hedge-fund Bankman-Fried also controlled.
As customers wait to see how much of their money will be returned, FTX is being stewarded by emergency CEO John Ray. The remnants of the company are currently up for auction, and the FTX exchange could be revived by a new buyer, which Securities and Exchange Commission Chair Gary Gensler said this week would be possible if the new owners operate "within the law." Among the reported bidders are former New York Stock Exchange president Tom Farley.
But FTX will need to shake off the stigma created by Bankman-Fried's crimes. The day the verdict was delivered, Sequoia partner Alfred Lin wrote on X, "SBF misled and deceived so many, from customers and employees to business partners and investors, including myself and Sequoia." But why did everyone trust the now 31-year-old founder, who seemed to come out of nowhere and prided himself on slovenly dressing?
With interest rates low and hype swirling around crypto, many investors had a sense of FOMO, Number Go Up author Zeke Faux told me earlier this year. The urge to jump in quickly led to a lot of investors rushing in without doing sufficient due diligence. If they had been paying closer attention, here's what they might have seen.
Many of the senior personnel at FTX and Alameda lived and worked together in a compound in the Bahamas. Notably, Bankman-Fried's sometime girlfriend Caroline Ellison, who testified against him, was Alameda's CEO, and their personal issues often spilled over into business conversations, according to documents shared with the media.
Even as FTX and Alameda grew, the companies had loose and overlapping corporate structures. They lacked key personnel for managing risk, and FTX never hired a CFO or a formal board of directors. "Some people cannot articulate a single thing the CFO is supposed to do," Bankman-Fried told reporter Michael Lewis in his book Going Infinite. "They'll say 'keep track of the money' or 'make projections.' I'm like, What the fuck do you think I do all day? You think I don't know how much money we have?" FTX was later reported to have an $8 billion shortfall.
On its own, the fact that FTX and Alameda had the same beneficial owner created a "strong conflict of interest," says Hatu Sheikh, co-founder and CMO of digital financial projects platform DAO Maker. FTX and Alameda also had intertwined financial interests in ways that allowed fraud to occur, including practices that "would not be possible in traditional markets," Sheikh says. FTX minted its own cryptocurrency tokens, which Alameda used as collateral for loans, and Alameda was the main source of liquidity on FTX.
Bankman-Fried moved his businesses to Hong Kong in 2019 and then the Bahamas in 2021, because, he has said, the Bahamian government was seen as friendly to the crypto industry. But that sort of jurisdiction shopping can make it harder for customers to recover their money if something goes wrong. "Platforms need to commit to jurisdictions and be regulated and be licensed," says Bobby Zagotta, CEO for U.S. business and global chief commercial officer of crypto exchange Bitstamp. "Customers need to be better educated and more aware of the risk profile associated with who they're working with."
FTX was a centralized exchange, which means customers were not able to view records of transactions on the exchange. Decentralized exchanges, by contrast, use smart contracts that are publicly viewable on the blockchain, says Shirin Bucknam, who runs the Brooklyn-based education platform Crypto Witch Club. Customers can access that information to view transactions on a decentralized exchange and how many tokens it is holding -- and generally get a better idea of how funds are flowing in and out.
Bucknam believes it was a major red flag that FTX encouraged customers -- and even, reportedly, FTX employees -- to keep their money on the exchange. Although holding money with FTX was touted as secure - as safe as keeping money in a bank - Buckman says that after someone buys cryptocurrency on an exchange, transferring that money to a noncustodial wallet (a separate wallet controlled by the investor) "is the only safe way to store crypto."
"If you leave your crypto on an exchange, there's so much opportunity to lose it," she says. "I also think if somebody's telling you their centralized exchange is a safe place to keep your money, run, because there's a reason they so badly need it on that exchange."
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The Warning Signs Were there about FTX--If Anyone Was Looking
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13.11.2023
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Almost exactly a year ago, FTX came crashing down to earth. At its peak, the cryptocurrency exchange was worth $32 billion and had high-profile investors like Sequoia Capital and BlackRock -- not to mention everyday investors who trusted FTX to hold their money.
On November 11, 2022, the company filed for bankruptcy. Within a year, FTX founder Sam Bankman-Fried was arrested, tried, and found guilty of seven counts of fraud and conspiracy. It turns out FTX customer money was secretly used to provide a $65 billion line of credit for Alameda Research, a hedge-fund Bankman-Fried also controlled.
As customers wait to see how much of their money will be returned, FTX is being stewarded by emergency CEO John Ray. The remnants of the company are currently up for auction,........
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