After a precipitous decline, crypto exchange FTX sought Chapter 11 bankruptcy shelter on November 11, 2022. Sam Bankman-Fried, the company’s creator and CEO, saw his combined wealth of $16 billion drop to almost nothing as the company’s value fell from $32 billion to collapse in a couple of days. The volatile cryptocurrency industry shed billions of dollars after FTX’s demise, bringing its total worth down to below $1 trillion. Following the FTX crash, a session will be held in December 2022, according to the U.S. House Financial Services Committee. Down below, we investigate the causes of FTX’s failure.
Why Did FTX Disappear?
The fall of FTX occurred over the course of ten days in November of 2022. The issue was sparked by a report published by CoinDesk on November 2 detailing a $5 billion stake in FTX’s native asset, FTT, owned by Bankman-quant Fried’s trading business, Alameda Research. In addition to fiat cash and other cryptocurrencies, the report showed that Alameda’s investment organization was also invested in FTT, the coin that its sister business had produced. The cryptocurrency sector as a whole began to worry about the unreported debt and viability of Bankman-enterprises Fried’s as a result.
Coins for Faster Transactions (FTT) Will Be Available on Binance, the Exchange Claims
The largest cryptocurrency market inside the world, Binance, said on November 6 that it will sell its entire holding of FTT tokens, or over 23 million tokens with a market value of nearly $529 million. The fall of the Terra (LUNA) crypto currency early in 2022 prompted Binance CEO Changpeng “CZ” Zhao to explain that the exchange’s move to sell its FTT stake was centered upon risk control.
An Overview of the FTX Liquidity Crisis and the Binance Agreement
The following day, FTX had a severe cash flow problem. Bankman-Fried tried to convince FTX investors that their funds were secure, but in the days after the CoinDesk revelation, users sought withdrawals totaling $6 billion. Before coming to Binance, Bankman-Fried attempted to raise cash from venture investors. FTT lost 80percent of its worth in only two days. On November 8th, the biggest cryptocurrency exchange throughout the world, Binance, said that it has signed a nonbinding deal to purchase FTX’s non-U.S. company for an unknown value, essentially saving its close competitor.
Trading Platform Binance Backs Out of FTX Rescue Agreement
Hopes of a rescue were quickly dashed when Binance reneged on the agreement the next day. Following concerns identified during corporate due diligence over the misuse of client cash, the exchange announced on November 9 that it would terminate the FTX agreement.
Former CEO Bankman-Fried Resigns, and FTX Declares Bankruptcy
On November 11th, Bankman-Fried resigned as CEO of FTX, and John J. Ray III, who previously oversaw the collapse of energy trading major Enron, was brought in to take his position. On the same day, FTX filed for Chapter 11 bankruptcy protection and disclosed that over 130 of its subsidiaries were also involved. FTX’s assets were listed in the bankruptcy papers as being between $10 billion and $50 billion, while its liabilities were also listed in that range.
Collapse of FTX and Its Future Implications
The continued operation of FTX as a crypto marketplace is in peril. The FTX website now “highly recommends against depositing” and has stopped withdrawals as of the middle of November 2022. Time is also needed for the full unfolding of the FTX debacle’s repercussions on the cryptocurrency market as a whole. As the greatest drop in cryptocurrency history, FTX may discourage investors who are wary due to worries about the industry’s long-term viability and security. Legal action may be necessary if FTX users cannot retrieve their investments. Congress could be more willing to pass new regulations controlling virtual currencies and marketplaces in response to the FTX failure, and the U.S. Securities and Exchange Commission (SEC) may use the failure as grounds for increased regulatory monitoring of crypto.