FTX, a major cryptocurrency exchange, announced on November 11 that it had filed for Chapter 11 bankruptcy. According to a November 11 press release, Sam Bankman-Fried, the founder and CEO of the company, has stepped down. The event followed an apparent hack in which more than $600 million was stolen from users' wallets.
FTX's bankruptcy advisors are still looking for most of the company's registered assets, which may indicate that FTX has limited funds to pay down its debt.
In a November 17 bankruptcy filing, new CEO John J. Ray III commented on the severity of FTX's unclear finances under his predecessor's management:
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
The FTX crash has triggered a domino effect across the crypto market as cryptocurrencies and exchanges involved in FTT or FTX struggle with falling prices and financial problems.
What happened to FTX?
FTX, a cryptocurrency exchange founded by Sam Bankman-Fried in 2019, was the fourth-largest crypto exchange by volume as of Nov. 9. FTX issued a native token, FTT.
Bankman-Fried founded a crypto trading firm called Alameda Research. The private equity offered full-service cryptocurrency trading and OTC trading. Alameda Research managed over a billion dollars in digital assets and trades between thousands of major coins, altcoins, and their derivatives as of April 2022.
FTX crash timeline
November 1: The first sign
A leaked balance sheet from Alameda Research, FTX CEO Sam Bankman-Fried's trading firm, revealed that most of its holdings are based on FTTs - native tokens that are centrally controlled and printed out of thin air. FTX used FTT tokens mainly as an incentive. Alameda has a lot of them - suggesting that it may be difficult to sell them at current prices.
November 6: Binance plans
CZ said that Binance would divest its FTT holdings, which date back to Binance's early investment in FTX. The price of FTT began to fluctuate after this announcement.
November 8: Binance offer
FTX's first visible sign of weakness came when it stopped repaying customers. Binance said it had signed a nonbinding LOI with FTX, adding that "FTX has asked for our help as they face a significant liquidity crunch."
After CZ revealed his takeover plan, FTT fell by another 75% on Tuesday.
November 9: Binance pull back & U.S. regulatory investigation
Binance, facing a “corporate due diligence” review that revealed issues in FTX’s financial situation, has backed away from the deal.
On the heels of its liquidity crisis, the SEC (Securities and Exchange Commission) and CFTC (Commodity Futures Trading Commission) launched investigations into Alameda Research and FTX US, sister entities to the company, along with allegations that it mishandled customer funds.
FTX's bad luck spread to the rest of the crypto industry. Another leading exchange Crypto.com stopped USDC and USDT withdrawals on the Solana blockchain. CEX referred to the FTX's role in trading Solana-based stablecoins and operating a Solana bridge. Furthermore, one of the larger Solana lending protocols, Solend, reported problems liquidating part of a large loan.
November 9: Alameda Research falls
Bankman-Fried announced that Alameda Research would close down its trading operations on Thursday as a last-ditch effort to save FTX. According to Reuters, FTX asked investors for $9.4 billion in rescue funds after many users withdrew their holdings.
FTX sought liquidity from rival exchange OKX and stablecoin issuer Tether. Bankman-Fried also sought funding from FTX's current investors, such as Sequoia Capital. He struck a deal with Justin Sun, the founder of the blockchain network Tron, to allow holders of Tron-related tokens to withdraw their holdings from FTX.
November 10: FTX US next
Despite Bankman-Fried's claim that FTX US is 100% liquid, the exchange posted on its website that "trading on FTX US may be halted in a few days. Please close any positions you wish to close. Withdrawals are and will remain open."
November 11: FTX bankruptcy and hack
FTX announced that it had filed for Chapter 11 bankruptcy and, as a result, the company's CEO resigned. Unlike Chapter 7 bankruptcy, which means assets liquidation, Chapter 11 allows businesses to restructure their debt.
FTX and its affiliates, including Alameda Research and FTX US, initiated the bankruptcy process to review and liquidate assets for the benefit of all global stakeholders. FTX Group has appointed John J. Ray III as its new CEO.
On the evening of Nov. 11, $600 million in FTX and FTX.US tokens were drained from the wallets of users in an apparent hack. Ryne Miller, the company's general counsel, tweeted that the company had taken precautions to put remaining digital assets into cold storage.
From November 12: Missing funds
The Financial Times published FTX's balance sheet on Nov. 14, which showed $9 billion in liabilities and just $900 million in liquid assets.
Furthermore, according to a Reuters report, at least $1 billion in funds disappeared from FTX customer accounts. When Bankman-Fried transferred $10 billion in client funds from FTX to Alameda Research, up to $2 billion of those funds disappeared.
The Bahamas Police is investigating whether "any criminal misconduct occurred."
What does this mean for the crypto market?
FTX's plight has had a major impact on the crypto market. The price of major cryptocurrencies was subject to sharp fluctuations. On November 9, Bitcoin fell below $16,000 on November 9, while Ethereum dropped below $1,100. Moreover, $3.2 billion worth of Bitcoin was taken off exchanges in the last 7 days.
Solana's price dipped below $13 following CoinDesk's report that Alameda held a large number of Solana coins.
Applications on the Solana network collectively lost over $700 million in assets last week.
The collapse of the crypto trading platform FTX highlights the riskiness of crypto exchanges, which are very different from traditional financial institutions. The nature of cryptocurrencies means that users must transfer ownership of their holdings to CEX. This is why choosing the right trading platform with a solid track record, and an experienced team is important.
In recent months, several big companies in the crypto industry have been forced to close down or lay off their staff as a result of a weak business model or ineffective management.
We want to remind you that PointPay will always keep your assets safe. We won't hold you back from trading and withdrawing funds whenever you need to. We will monitor the market and keep you informed of any new developments.