Last week, investors rushed to withdraw their funds from FTX, one of the world’s largest cryptocurrency exchanges, fearing that it was about to collapse.
The company’s owner, Sam Bankman-Fried, claimed that there was no risk to the fund. That turned out not to be true: On Friday, FTX filed for Chapter 11 bankruptcy, and Bankman-Fried stepped down as CEO.
It has since been reported that at least $1 billion of customers’ money has gone missing, and there were rumors that Bankman-Fried had fled to South America, which he denied.
FTX’s implosion is being called crypto’s “Lehman Brothers moment” — a reference to the investment bank collapse that was set off by the 2008 subprime mortgage crisis. Here’s everything you need to know about FTX, in layperson’s terms.
What is FTX?
Established in 2019, FTX was one of the world’s fastest-growing cryptocurrency exchanges. Customers could buy and sell a range of digital currencies using its online service.
Throughout the early stages of the pandemic, when crypto soared in value, FTX’s revenues grew 1,000%. And the company had a reputation for spending. It bought naming rights to the Miami Heat’s arena for $135 million in June 2021 and invested billions in everything from crypto mining firms to artificial intelligence research. At one point, it considered buying US megabank JPMorgan Chase.
FTX pushed for digital currencies to go mainstream, backing major advertising campaigns to sell crypto to less experienced investors. It gave Tom Brady and Gisele Bündchen $20 million in shares of FTX and crypto to star together in an ad campaign for the company. Their stake in FTX is now effectively worthless.
NBA legend Steph Curry also became an ambassador for the company in return for stock. Larry David was paid to star in a Super Bowl commercial for FTX. At the time, the ad was quite amusing.
While the crypto industry has a reputation for bad behavior and scams, FTX held itself up as one of the grown-ups. It lobbied for more effective government regulation of crypto and offered to bail out other firms when they went bust.
Who owns it?
The company was founded in 2019 by Sam Bankman-Fried, better known as SBF, and former Google staffer Gary Yang.
Bankman-Fried, who was CEO, is the 30-year-old son of two Stanford law professors. He graduated from the Massachusetts Institute of Technology with a physics degree and spent time as a trader before starting up FTX.
He soon became one of the richest men in crypto, at one point worth some $26.5 billion. Known for his tousled hair and cargo shorts, he courted the press and was hailed as crypto’s “golden boy.” He defied typical CEO behavior, playing League of Legends during business calls and allegedly living in a polyamorous group with 10 colleagues in the Bahamas.
Bankman-Fried was known as an adherent of the “effective altruism” movement — which asks adherents to choose their careers and actions to best advance humanity — and set up a foundation to give his wealth away. He was also a major Democratic donor, promising to give away $1 billion in the 2022 midterms, though he later walked back that commitment.
While FTX’s leaders were Americans, including co-CEO and Republican donor Ryan Salame, the company was based in the Bahamas. A well-known tax haven, the island country has lighter financial regulation, meaning that FTX was able to do trades and sell products to clients that it couldn’t in the US.
What went wrong?
In short, FTX ran out of money. More specifically, it ran out of its clients’ money.
In addition to FTX, Bankman-Fried owned a crypto hedge fund called Alameda Research. The two businesses are supposed to be separate. This is especially important because FTX managed funds belonging to customers.
However, on Nov. 2, crypto news site CoinDesk reported that Alameda held billions of dollars of a cryptocurrency created by FTX. This led people to question how much money was really in Alameda, and whether money held in FTX was safe.
Bankman-Fried initially denied the report, saying in since-deleted tweets that “FTX is fine” and was the victim of rumors spread by a competitor. Nevertheless, clients rushed to remove their funds from their FTX accounts. The very next day, Bankman-Fried announced that the company was suffering from a “liquidity crisis,” meaning that people were asking for more money than FTX had available.
Could FTX have been saved?
When Bankman-Fried announced the crisis, he said that the largest crypto exchange, Binance, had expressed interest in buying FTX. This would mean that clients’ funds would have been protected.
However, Binance’s owner, Changpeng Zhao, said that the deal was subject to due diligence. In the end, Binance withdrew from the deal. The company tweeted that owing to “reports regarding mishandled customer funds and alleged US agency investigations,” it would not rescue FTX.
On Thursday, Bankman-Fried tweeted out an apology:
1) I'm sorry. That's the biggest thing. I fucked up, and should have done better.
On Friday, FTX filed for bankruptcy and Bankman-Fried stepped down as CEO of the company.
The next day, things went from bad to worse as John Ray, who had been appointed as FTX’s new CEO, revealed that the firm had been hacked. Crypto researchers estimated that around $500 million had been stolen.
Who are the losers here?
The immediate loser is Bankman-Fried. Once feted as a crypto wunderkind, his reputation is now in tatters. Bloomberg, which once featured him on its Billionaires Index, estimated that his wealth had fallen from $16 billion to zero in days.
The real losers, though, are the clients who had money in FTX. They are currently unable to withdraw their cash.
What happens next?
Whenever a financial institution collapses, there is a rush by investors, customers, and other creditors to see if they can save their funds.
While FTX did business in the Bahamas, it was owned by a company in Delaware. It has entered Chapter 11 bankruptcy, meaning a court will examine how much money is left in FTX and its group of companies and how much to pay back to creditors.
There is a risk that the collapse of FTX will lead to further instability in the crypto market. Over the last few days, the price of bitcoin fell from around $20,000 to $16,500.
And on Saturday, Bloomberg reported that Bankman-Fried had been interviewed by the Bahamian police. Questions are now being raised as to whether a criminal investigation will be launched.