On November 11, 2022, FTX, formerly a $32 billion cryptocurrency exchange, filed for bankruptcy. Meanwhile, Sam Bankman-Fried, the company’s former CEO and founder were detained on December 12 in the Bahamas and extradited to the United States. There, he was charged with eight crimes, including wire fraud and conspiracy to defraud investors, for which he pleaded not guilty.
This collapse of FTX has wide-ranging effects on the whole cryptocurrency market as exchanges and cryptocurrencies with exposure to FTX or its native token, FTT, see declining pricing and other financial difficulties.
Up until now, market players have had trouble gauging the extent of its impact and how it will change the sector in the years to come.
What happened to FTX?
The downfall of FTX happened over several days span in November 2022. The turning point came on November 2, when crypto news website CoinDesk published a report that Bankman-Fried’s trading company, Alameda Research, had a $5 billion position in FTT, the FTX native token.
According to the report, Alameda’s investment foundation used FTT, a token created by its sister firm, rather than fiat money or cryptocurrency. That raised questions about Bankman-Fried’s enterprises’ unreported leverage and solvency throughout the cryptocurrency sector.
Below are the key points of the FTX Collapse Timeline:
November 2 to 8: Coindesk Reports and Sell-Offs
- Sam Bankman-Fried launched the now-defunct FTX cryptocurrency exchange in 2019. He presided as CEO from January 1, 2019, to November 11, 2022. As of November 9, the exchange, which had its own token called FTT, was the fourth-largest cryptocurrency exchange by volume.
- On November 2, Coindesk released a report regarding Alameda Research, a cryptocurrency trading company that Bankman-Fried also started, and its questionable balance sheet. According to the research, it has FTT is worth billions of dollars as its biggest asset.
- Changpeng Zhao, popularly known as CZ, the CEO of rival exchange Binance, tweeted on November 6 that he intended to sell out Binance’s stockpile of FTT due to “recent revelations that have come to light”, alluding to the CoinDesk article from November 2 about FTX and Alameda’s muddled money. The collapse of TerraUSD and LUNA in 2022, which wrecked the cryptocurrency market and cost investors billions of dollars, was likened to FTX’s predicament by the speaker. However, such actions usually aren’t made public.
- Zhao’s revelation caused a sharp drop in the value of FTT during the following day as concerns developed that FTX lacked the liquidity required to support transactions and remain afloat. Other coins, like BTC and ETH, also saw a dip in value as Bitcoin hit a two-year low. In a tweet on November 10, Bankman-Fried reported that $5 billion had been withdrawn from the platform on November 6.
November 8 to 11: Deals and Withdrawals
- Zhao and Bankman-Fried negotiated an agreement for Binance to buy FTX’s international division. On November 8, the CEOs of the exchanges agreed to a non-binding letter of intent, basically pledging to save the faltering exchange and avert a further market catastrophe.
- On November 8, FTX stopped all withdrawals from non-fiat customers. FTX’s liquidity problems were explained in a series of tweets by Bankman-Fried, who also promised greater transparency.
- Binance pulled out of the deal. Zhao said on Twitter on November 9 that Binance has finished its “corporate due diligence” and will not be purchasing FTX. Zhao said in a tweet that his choice was influenced by news stories about “mishandled customer monies” and “possible U.S. government probes.” In a mysterious tweet that ended with the words “Well played; you won,” Bankman-Fried seemed to be alluding to Zhao’s impact on FTX’s decline.
November 11: Bankruptcy Filings and Hacked Reports
- On November 11, FTX made the voluntary Chapter 11 bankruptcy filing for FTX, FTX.US, and Alameda. In contrast to Chapter 7 bankruptcy, which involves liquidating assets, Chapter 11 bankruptcy enables businesses to restructure their debt and carry on with operations.
- FTX.US temporarily stopped accepting withdrawals on November 11 when FTX announced its bankruptcy, despite earlier assurances that FTX.US was unaffected by FTX’s liquidity issues. Later, withdrawals were reopened.
- In an apparent hack, both FTX and FTX.US wallets were emptied on the evening of November 11. According to CoinDesk, more than $600 million was stolen from the wallets. On its help page on the messaging app Telegram, FTX announced the hack, writing, “FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don’t go on the FTX site as it might download Trojans.” Trojan horses are malware that poses as trustworthy programs.
- According to a Twitter user, hackers were reportedly attempting to gain access to FTX-related bank accounts. The US. Plaid, a company that links consumer bank accounts with financial applications, blocked FTX’s access to its goods in response to “concerning public reports,” even though they didn’t see any evidence that its tools had been misused illegally.
- The same evening, FTX general counsel Ryne Miller announced on Twitter that due to the “unauthorised transactions,” or the apparent breach, the business would swiftly move any remaining assets to cold storage
November 12 to Present: The Repercussions
- The Financial Times released FTX’s balance sheet on November 10; it showed $9 billion in liabilities and $900 million in easily marketable assets. It contained a jumble of entries, one of which was a “secret, erroneously named ‘fiat@’ account” with a negative $8 billion balance.
- FTX is currently the subject of a criminal investigation in the Bahamas, where the exchange is situated. According to CoinDesk, Bankman-Fried resided there with nine coworkers and romantic partners who assisted him in managing his businesses. Former FTX employees who were questioned by CoinDesk claimed that only this inner circle was aware of the complicated financial situations involving the companies.
- In a court document submitted to the District of Delaware’s U.S. Bankruptcy Court on November 17, FTX’s new CEO, Ray, gave a pessimistic view of the company’s financial situation. According to him, FTX failed to maintain “proper books or records, or security controls, with respect to its digital assets.”
- There is “credible evidence,” according to an emergency motion attached to the FTX bankruptcy filing on November 17, that Bahamian regulators gave Bankman-Fried instructions to access FTX monies “unauthorizedly” and transfer them to the Bahamian government. These transactions would have occurred around the same time as the hack, so it’s unknown if or when they occurred. These reports appear to be supported by a news release from the Bahamas Securities Commission.
- Authorities in the Bahamas detained Bankman-Fried on December 12 in response to a request from the United States government for his extradition because of eight criminal offences, including wire fraud and a conspiracy to deceive investors. The House Financial Services Committee had scheduled a hearing with Bankman-Fried for the next day.
- Instead of Bankman-Fried, FTX CEO John J. Ray III gave testimony to the House committee on December 13. He stated to MPs that FTX had no record-keeping.
- Federal prosecutors stated that on December 19, former Alameda Research CEO Caroline Ellison and co-founder of FTX Gary Wang entered pleas of guilty to “charges arising from their participation in schemes to defraud FTX’s clients and investors, and related crimes.” In the FTX case, the two are assisting the government.
- Bankman-Fried appeared in a New York court on January 3 and entered a not-guilty plea to all of the accusations levelled against him. Due to Bankman-determination Fried’s to dispute the accusations, a criminal trial may occur.
Five lessons the industry must learn from the FTX crisis
The collapse of FTX caused consumers and investors to lose billions of dollars. Still, it also had significant long-term effects, including declining public confidence in the cryptocurrency sector. Entrepreneurs and other people must then inquire how this occurred and what can be done to stop it from happening again. While continuing to explore the limits of Web3, we must commit to addressing dishonest or negligent operators.
Here are the five things that we think the blockchain industry must learn from this crisis:
We need a legal system that can both safeguard users and encourage innovation. The current system of enforcement-based regulation must change. To produce legislation similar to the 1996 Telecommunication Act, which established the circumstances for innovation to flourish responsibly, policymakers and business leaders must collaborate. Any new regulations must distinguish between the technology and the businesses that create the services built on top of it.
Consider the Internet as a model wherein neither network time nor HTTP is governed by anyone. However, we do try to oversee companies like Amazon, Internet service providers like Comcast, and platforms like PayPal that use those protocols.
Policymakers need to realise that excessive centralisation in crypto business intermediaries, which hide their decision-making and financial health from the public, is the real problem in the case of catastrophes like FTX, not decentralisation.
Let’s not lose sight of what makes blockchain technology revolutionary and concentrate our efforts on creating goods and services that capitalise on its advantages, such as the ability for anyone, anywhere to transfer stores, and manage their assets with one another. Let’s encourage the companies who are attempting to create a better Web and a more open and accessible financial system for everyone. Similar to how the Internet was the first digital informational medium, blockchains are the first digital medium for value.
A digital native asset class is required for payments, savings, and other financial instruments in our digital economy. Instead of complex trading platforms and obscure financial instruments, the next generation of entrepreneurs in this field should concentrate on developing straightforward, user-friendly Web3 applications that appeal to a wide audience and address more real-world issues. Create items that common folks can comprehend and will want and need.
We need to stop idolising the centralised company leaders who founded cryptocurrencies. The truth is that middleware like FTX does not necessarily need to rule the market. The fact that Web3 is open-source and decentralised, allowing anybody, anywhere, to own digital assets, manage them peer to peer, and participate in their governance, is ultimately what makes it so appealing. This was first made possible by Bitcoin, and it has since been greatly accelerated by Ethereum and DeFi applications.
To be truthful, FTX provided a fantastic user interface and experience, but it lacked enough control, improved risk management, and greater transparency. Businesses like FTX have provided crucial on-ramps to this asset class and the larger Web3 market, and they may continue to do so. An industry, however, must not be defined by its entry points. Currently, Binance is responsible for 50% of all volumes in crypto assets. Even while we may praise it today for having survived, everyone should be concerned about concentration like this.
Transition to Public Blockchains
Businesses that thrive to use Public blockchains for Web3 development need more support from the industry. Many large businesses are prepared to switch to Ethereum and other public infrastructure after years of experimenting with closed systems like permissioned blockchains and other closed systems. Although such platforms were unable to add value, they did allow those businesses to become familiar with the technology. Now let’s construct more onramps so they may utilise this public infrastructure for practical, commercial uses.
NFTs are a wonderful place to start because they can “red-pill” a large company on Web3 and pave the way for other developments.
More corporate innovation in this area will benefit Web3 users and developers, but investors will also gain from it. After all, if hundreds of businesses use this technology, they’ll probably need to own the underlying asset as well in order to maintain a node and pay for gas fees, and other costs.
Trust and User Experience
Although self-custody is a feature for certain individuals, we must acknowledge that it is a big barrier to Web3 adoption for others. This indicates that people still require dependable service providers in this area. Many users have a valid fear of holding their assets because the technology tools of Web3 are not intuitive to everyone.
Roneil Rumburg, the founder of Web3 music platform Audius, acknowledges that a self-sovereign crypto user nowadays is possible. However, the accessibility for doing so is still so significant that it’s out of reach for many mainstream users. However, he highlighted that the FTX issue should lead to more time and resources spent on improving the usability of fully self-sovereign, decentralised digital asset management processes.
Web3 developers are creating technologies that are more accessible, but people and businesses, in particular, will still require reliable agents and partners. Behind enforcing industry norms like proof-of-reserve requirements, reasonable laws, and social consensus and collaboration, we may encourage good actors. In other words, we should expose malicious activities when they emerge and stand by those who speak the truth to power.
The goal of Web3 was to eliminate “too big to fail” intermediaries. FTX is exactly what Satoshi Nakamoto, Bitcoin’s creator, was trying to avoid: a centralised organisation that utilised its power to take unreasonably high risks in an unregulated market. Retail ultimately paid the highest price. We need to leave this crisis with a revitalised commitment to regulating centrally controlled financial intermediaries, regardless of the technology they employ, and to create safe, straightforward, decentralised tools using open protocols.