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What the FTX happened ?
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Whether or not you own cryptocurrency, you've likely heard at least one story about popular crypto exchange FTX losing billions of customer dollars, and filing for bankruptcy.
The fall of FTX has and will continue to impact the entire crypto ecosystem, regulations, and consumer confidence and their wallets.
We'll take a first look at why and what has happened to help you as you decide what next steps may be right for you.
Nov 13 Update: Hours after popular cryptocurrency exchange FTX filed for bankruptcy there was "unauthorized access" to its accounts, and $477 million went missing from the exchange.
An additional $186 million was (hopefully) moved by FTX to a cold wallet custodian (off-line storage) for up to $663 million. Ongoing social media debate centers on whether the exchange was hacked or a company insider stole funds.
The fall of FTX has prompted a closer look at its rival Binance and the need for transparency into reserves. Just days before FTX's collapse, Binance had written about its standard for proving reserves and the security of its BUSD token. We'll look at proof-of-reserves and stable coins, like BUSD, in future posts - so check back often.
Let's hope a positive take-away from the FTX crisis is greater transparency, more reliable proof of tangible reserves, and prudent, innovation-encouraging, investor-protective oversight by regulators.
In the meantime, let's review why and what happened, so you can take the right next steps for you.
Questions addressed in this post:*
If you are a newbie or want a refresher, start with “What is Cryptocurrency” at the bottom of the post.
What is FTX? and who is Sam Bankman-Fried?
Is BINANCE savior or catalyst in the fall of FTX?
What does FTX's bankruptcy mean for retail investors like me?
What is cryptocurrency, really?
THE PLAYERS
FTX = crypto exchange founded by Sam Bankman Fried (SBF).
BINANCE = world’s largest crypto exchange, and main FTX competitor, led by Changpeng Zhao (CZ).
Binance is also an investor in its main rival FTX = “Keep your friends close and your enemies closer."
WHERE WE ARE NOW
FTX has filed for bankruptcy protection in the U.S. Bankruptcy Court in Delaware. FTX is unable to meet customer demand for withdrawal of their funds ($) from their FTX accounts.
FTX is estimated to owe its customers more than $8 Billion dollars.
The bankruptcy filing includes the FTX U.S.-based exchange - despite FTX claiming just a day earlier that its US operations had no financial exposure to FTX's parent company’s “liquidity” issues.
FTX's total liability is estimated at between $10 billion and $50 billion dollars. The company has more than $100,000 creditors.
The founder of FTX, Sam Bankman-Fried has resigned, and John J. Ray III, a corporate turnaround specialist, has taken over as chief executive.
FTX has filed for bankruptcy under Chapter 11, which allows the company to continue operations. (Chapter 7, liquidates assets).
It is unclear what will happen to the customer funds that remained in FTX’s accounts (see update) - and whether investors will be able to recover their assets.
While an initial filing suggested that “unsecured creditors” = FTX’s customers, would be able to receive their assets, FTX is estimated to be facing liabilities (obligations) that exceed $10 billion dollars – with less than $1 billion dollars available to meet obligations.
In addition to its liquidity gap (owing more than you have), FTX is also facing allegations of violating its own policy documents prohibiting the use of consumer funds for any other purpose than customer trades, and the SEC is expanding its investigation into – and may be facing potential securities law violations.
The fall of FTX has and will continue to impact the entire crypto ecosystem – not only pressuring the prices of cryptocurrencies Bitcoin (BTC), Etherum (ETC) and particularly, Solona (SOL), but also regulatory investigation and oversight and consumer confidence – and their wallets.
The only thing that is certain at the moment is that things will change, so let’s start with a good understanding of what happened and why.
HOW IT STARTED
A leaked financial document raised concerns about the financial health of FTX’s allegedly separate trading arm, Alameda Research.
The document revealed that the bulk of Alameda’s assets were actually FTT tokens minted by its sister company FTX – meaning that any financial difficulty at Alameda would have a big impact on FTX.
This was a red flag for investors and industry players:
“It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token,” said investment platform Swan Bitcoin.
This revelation, with a little help from “some savvy maneuvers from a competing exchange, Binance," resulted in investors selling off FTT and pulling their money out of their accounts FTX en mass.
FTX was unable to meet customer demand for their money.
Early on Nov. 10th, rival exchange Binance announced it would buy out FTX to solve the problem. Within hours, Binance pulled out of the deal and raised concerns beyond FTX’s liquidity in a statement on Twitter:
“As a result of corporate due diligence [investigation & analysis], as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com.”
The question now, is not whether there was a natural drop in price - as often happens to public company shares and stock markets when there is negative market, company, or economic news, and supply is greater than demand, but whether FTX improperly used customer funds to prop up its sister company Alameda – and misled investors and the public in doing so.
The top question in customers’ minds = "will I be able to recover the funds in my account"
SO, WHAT DO I DO?
This depends on your personal financial circumstances, time horizon, risk profile, and overall financial needs and goals.
A smart move would be to speak with your financial advisor and tax and legal professionals about what steps are best for you.
Be careful not to get caught up in the sensationalism of media reports and carefully review your personal financial needs and goals.
Check back often, as we'll do our best to keep you updated on key developments.
WHAT IS CRYPTOCURRENCY
Cryptocurrency can be a store of value or medium of exchange, like the US dollar, but it is digital and uses encryption techniques to control the creation of units and verify transactions rather than a nation, federal bank, or financial intermediary. It is a digital asset (it exists online, not physically).
Both “coins” and “tokens” fall under the cryptocurrency umbrella. The terms are often used interchangeably by they are quite different. A coin is a cryptocurrency that is native to the blockchain it runs on. Tokens do not have their own blockchain and are issued on top of existing networks. From a technological perspective, coins are mined, and tokens are minted.
CRYPTO SIGNICANTLY IMPACTED BY FTX COLLAPSE
SOL – Solana = Solana blockchain native coin
FTT – FTX token (Solona)
BNB – Binance token (Etherum)
BTC – Bitcoin = Blockchain native coin
ETH – Ether = Etherum native coin
Feel free to send us your questions, and check back often, as we'll do our best to keep you updated on key developments.
Author Disclosure - The author owns cryptocurrencies, including those mentioned in this article, and has accounts with several crypto exchanges and custodians.
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