FTX Exchange Collapse and Bankruptcy

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FTX Exchange Collage

FTX Trading Ltd., once a major cryptocurrency exchange firm valued at around $40 billion, collapsed over a 10-day period in November 2022. The catalyst for its fall was a report by CoinDesk on November 2, which revealed that Alameda Research, a quantitative trading firm also run by Sam Bankman-Fried, held a $5 billion position in FTT, the native token of FTX. This disclosure raised concerns about undisclosed leverage and solvency across Bankman-Fried's companies. Sam Bankman-Fried, the former crypto billionaire at the center of this scandal, is now facing the largest-ever pretrial bond, set at $250 million.

About FTX

"FTX Trading Ltd. was one of the largest cryptocurrency exchange firms, known for its specialty in buying and selling crypto derivatives, and once valued at about $40 billion"

History Of FTX

Investors to FTX included Temasak, Paradigm, the Ontario Teachers’ Pension Plan Board, and NEA.

The Reality

FTX was a complicated corporate structure which allowed client assets to be used as collateral in risky trade deals conducted by Alameda Research.

A large portion of the assets of FTX were held in FTT, a token created by FTX. Rival exchange Binance held a large amount of FTT.

What Happened

FTX’s collapse took place over a 10-day period in November 2022.

Key Event Timeline - FTX Exchange Collapse and Bankruptcy

Date	Event	Description
January 31st, 2022 7:42:00 AM MST	FTX Funds Raised	FTX Trading, a major cryptocurrency exchange, raises $400 million in its third funding round in six months, increasing its valuation to $32 billion. The funding round saw participation from existing investors, including Temasak, Paradigm, the Ontario Teachers’ Pension Plan Board, and NEA. This comes shortly after FTX U.S., the independently operated sister exchange, also raised $400 million. FTX CEO Sam Bankman-Fried stated that this funding will support expansion into new regions and enhance their offerings. FTX has grown rapidly since its launch two years ago, with a 60% increase in its user base and an average daily trading volume of approximately $14 billion. Despite the recent crypto market downturn, Bankman-Fried expressed optimism, suggesting that the selloff isn't indicative of a long-term "crypto winter." Prior to the funding, Sam Bankman-Fried is worth an estimated $17.1b, the world's richest 29 year old.
November 2nd, 2022	CoinDesk Report Catalyst	"The catalyst was a Nov. 2 scoop by crypto news site CoinDesk that revealed that Alameda Research, the quantitative trading firm also run by Bankman-Fried, held a position valued at $5 billion in FTT, the native token of FTX. The report disclosed that Alameda’s investment foundation was also in FTT, the token that its sister company had invented, not a fiat currency or other cryptocurrency. That prompted concern across the cryptocurrency industry regarding Bankman-Fried’s companies’ undisclosed leverage and solvency."
November 6th, 2022 11:00:00 AM MST	FTT Token Sale	Rival exchange Binance sells all FTT tokens.
November 7th, 2022	Bailout Sought	FTX announces liquidity crisis, seeks bailout from venture capitalists, then Binance.
November 8th, 2022	Binance Buy Out	Binance says it will buy FTX’s non-U.S. business.
November 9th, 2022 7:30:00 AM MST	CZ Shares Internal Update	CZ publishes a tweet which is being sent through the company.
November 9th, 2022	Binance Walks Away	Binance walks away from FTX acquisition after conducting due diligence.
November 10th, 2022 9:48:00 AM MST	Python Script For Extracting Records	Shane Barratt publishes a Python script for extracting tax information from the platform, and advises users to pull their data quickly while they still can.
November 10th, 2022	Bahamas Asset Freeze	The Bahamas freeze assets of FTX’s subsidiary there; Bankman-Fried admits non-U.S. businesses’ liquidity crisis, says affiliate Alameda Research to wind down.
November 10th, 2022 2:46:01 PM MST	Bahamian Resident Withdrawals	Blockworks reports that FTX.com has "temporarily" halted withdrawals due to a solvency crisis and the search for new funding. Although most FTX customers are still unable to withdraw their funds, withdrawal activity totaling up to $7.2 million was observed. FTX confirmed via Twitter that individuals within the Bahamas were allowed to withdraw funds. FTX stated that it is actively working on enabling withdrawals for users worldwide. A former FTX staff member, Zane Tackett, revealed on Twitter that he had a significant portion of his funds stored on the exchange. FTX allowed Tron-based tokens such as TRX, BTT, JST, SUN, and HT to be swapped from FTX to external wallets at a 1:1 ratio, thanks to an agreement with Tron. This led to Tron (TRX) on FTX trading at approximately seven times the market price elsewhere. FTX US, a separate entity, announced that trading "may be halted" in a few days but assured users that withdrawals will remain open. Users were advised to close their positions as needed and await further updates.
November 11th, 2022	CEO Step Down	Bankman-Fried steps down as FTX CEO, is replaced by a court-appointed CEO with restructuring experience. FTX files for Chapter 11 bankruptcy protection.
November 11th, 2022 2:14:45 PM MST	Bankrupt But Trading Still Operating	Blockworks reports that despite filing for bankruptcy, FTX continues to allow crypto trading on its platform. Customers are unable to withdraw funds, but trading on FTX's website and mobile app is functioning normally. There has been over $200 million in spot bitcoin trading volume and over $300 million in volume for bitcoin and ether perpetual contracts on FTX, although volumes have been declining since its bankruptcy filings, and popular crypto trackers have removed FTX from their volume rankings. A regulatory loophole in the Bahamas allows local accounts to still make withdrawals. Using the account tools provided by FTX is also easier for users to maintain their tax records.
November 12th, 2022	FTX Assets Hacked	FTX reports an alleged hack, suspected to be up to $477 million, and moves its digital assets to cold storage for security reasons.
November 18th, 2022	Bahamas Asset Control	The Bahamas takes control of FTX assets held there.
December 9th, 2022 2:45:10 PM MST	Patrick Boyle Video	Patrick Boyle includes Sam Bankman-Fried as an example of a con man in his video "Why We Trust Fraudsters!". The video also details more about the reactions of different companies who had invested or participated in the FTX scandal.
December 12th, 2022	Extradition	Bankman-Fried is arrested by Bahamian authorities. He’s later extradited to the U.S.
December 13th, 2022 2:53:00 PM MST	Bail Denied	Sam Bankman-Fried is reportedly denied bail.
December 22nd, 2022	Bail Bond Release	Bankman-Fried is released on a $250 million bond, the largest in history, by a federal judge.
September 11th, 2023 5:00:06 PM MDT	Crypto Liquidation	Preparing for liquidation of assets held by FTX.
September 13th, 2023 11:41:00 AM MDT	FTX Able To Use Assets	CoinDesk reports that a judge in the U.S. Bankruptcy Court for the District of Delaware has ruled that crypto exchange FTX can sell, invest, stake, and hedge its crypto holdings to pay back creditors. The judge approved the motion and overruled objections, allowing FTX to use its crypto assets worth over $3.4 billion for these purposes. FTX had submitted a request for permission to engage in these activities in August, with the goal of limiting potential downside risk and generating low-risk returns on idle digital assets. The exchange also sought to hire Mike Novogratz of Galaxy Digital as an adviser. FTX recently disclosed holdings of $1.16 billion in Solana (SOL) and $560 million in Bitcoin (BTC), along with lesser-known illiquid tokens.
September 14th, 2023 1:49:37 AM MDT	Crypto News Flash Article	Crypto News Flash reports that FTX Exchange has gained approval from the U.S. Bankruptcy Court to sell its cryptocurrency assets, which are valued at around $3.4 billion. This move is aimed at repaying its creditors and has garnered significant attention in the crypto market. The court's decision allows FTX to systematically sell, hedge, and stake its digital assets. While there have been concerns about potential market volatility (FUD) due to FTX's decision to liquidate its crypto assets, the current market appears stable, with Bitcoin showing a 0.75% increase in the past 24 hours, trading at $26,129.05.
September 14th, 2023 7:44:52 AM MDT	Traders Impacted By FTX Liquidation	Video mentioning FTX liquidation and impact on the market.

Technical Details

FTX was a complicated mix of corporate entities.

Total Amount Lost

The total amount lost has been estimated at $8,000,000,000 USD.

Immediate Reactions

The FTX platform remained online for a significant period of time after bankruptcy, allowing users to trade and gather tax information. Some users could even withdraw, if they were based in the Bahamas, using Tron tokens, or using the FTX US platform, which did not declare bankruptcy at the same time.

Platform Still Online During Bankruptcy

During a short period after filing for bankruptcy, FTX continued to allow crypto trading on its platform. Customers were unable to withdraw funds, but trading on FTX's website and mobile app is functioning normally. There were over $200 million in spot bitcoin trading volume and over $300 million in volume for bitcoin and ether perpetual contracts on FTX.

FTX's volumes have been declining since its bankruptcy filings. While popular crypto trackers have removed FTX from their volume rankings, the exchange's markets remain operational. This raises questions about why users would continue trading on an exchange when they can't withdraw their assets.

One reason for keeping the website and user accounts accessible is to allow customers to access their trading records, which are necessary for tax reporting and potential asset recovery processes in bankruptcy. While this could still be done if the website is shut down, using the account tools provided by FTX makes it easier for users to maintain their records.

Withdrawals For Bahama User Accounts

In the period following the bankruptcy, many Bahama-based user accounts remained able to withdraw funds due to a regulatory loophole. Although most FTX customers are still unable to withdraw their funds, limited withdrawal activity, totaling up to $7.2 million, was observed.

FTX confirmed via Twitter that individuals within the Bahamas were allowed to withdraw funds, indicating a potential prioritization of employees or insiders with verified local Bahamas accounts. A former FTX staff member, Zane Tackett, revealed on Twitter that he had a significant portion of his funds stored on the exchange. FTX stated that it is actively working on enabling withdrawals for users worldwide.

Users were taking advantage of this by using FTX's NFT marketplace to set up self-dealing auctions of low-value NFTs and then withdraw the proceeds as USDT stablecoins through Bahamas-based user accounts. NFTs with no utility reportedly saw significant sales.

Withdrawals For Tron-Based Tokens

FTX allowed holders of Tron-based tokens such as TRX, BTT, JST, SUN, and HT to swap assets from FTX to external wallets at a 1:1 ratio, thanks to an agreement with Tron.

This led to a situation where Tron (TRX) on FTX was trading at approximately seven times the market price elsewhere.

Withdrawals Within FTX US

Shortly after FTX went bankrupt, FTX US, which is a separate entity, announced that trading "may be halted" in a few days but assured users that withdrawals will remain open. Users were advised to close their positions as needed and await further updates.

Reactions On Twitter

Fail to understand trying to scapegoat CZ for everything. Would they rather FTX/Alameda continued operating the house of cards only for the inevitable fallout to be 10x worse? It's like pinning the Luna fiasco on everyone who cautioned about it

Sets very dangerous precedents.

for those wondering …

any money you have on FTX is pretty much lost

dark day in crypto, we simply pray for better times

love you all

gn

Attempted Acquisition By Binance

CZ published a notice which was shared internally during the acquisition period.

Binancians,

Given the events that transpired over the last couple of days. I want to reiterate a few points.

One, we did not master plan this or anything related to it. It was less than 24 hrs ago that SBF called me. And before that, I had very little knowledge of the internal state of things at FTX. I could do some mental calculations with our revenues to guess theirs, but it would never be very accurate. I was surprised when he wanted to talk. My first reaction was, he wants to do an OTC deal... But here we are.

Two, as the due diligence for the deal is on-going, I want to remind everyone: DO NOT trade FTT tokens. If you have a bag, you have a bag. DO NOT buy or sell. As soon as I finished the call with SBF yesterday, I asked our team to stop selling as an organization. Yes, we have a bag. But that's ok. More importantly, we need to hold ourselves to a higher standard than even in banks.

Three, obviously, do not comment on the deal, publicly or internally. If you are not directly involved, don't ask. We have a good team handling it. Things will play out.

Four, FTX going down is not good for anyone in the industry. Do not view it as a "win for us". User confidence is severely shaken. Regulators will scrutinize exchanges even more. Licenses around the globe will be harder to get. And people now think we are the biggest and will attack us more. But that's OK, we are used to being open and leaning into headwinds. In fact, we embrace scrutiny. We must significantly increase our transparency, proof-of-reserves, insurance funds, etc. A lot more to come in this area. We have a lot of tough work ahead of us. Not to mention prices swinging wildly.

Five, speaking of prices. As I have said many times over the years, ignore the prices. Let's keep our heads down and focus on building products people use. It has always worked over the years, and today is obviously no exception.

Lastly, I want to say I am really proud of each and every one of you, for all your hard work and as a team. Thank you! We still have many challenges ahead of us, let's continue to push ahead and help increase the freedom of money all around the world, steadily and consistently.

CZ

Ultimate Outcome

Sam Bankman-Fried, the former crypto billionaire at the center of this scandal, is now facing the largest-ever pretrial bond, set at $250 million. The conditions for his release include wearing an electronic monitoring bracelet, undergoing mental health counseling, and restricting his travel to certain U.S. districts.

Bankman-Fried, who voluntarily returned to the U.S. and has significantly reduced financial assets, was described by prosecutors as the mastermind behind "a fraud of epic proportions." Despite once leading a $32 billion crypto empire, he claimed to have only $100,000 left. Comparatively, his bail amount far exceeds those set for other high-profile white-collar defendants like Bernie Madoff, Jeff Skilling, and Elizabeth Holmes.

"In addition to the $250 million package, which prosecutors called “the largest-ever pretrial bond,” the former crypto billionaire would also be required to wear an electronic monitoring bracelet, submit to mental health counseling and restrict himself [to] travel within and between the Northern District of California and the Southern & Eastern Districts of New York.

Judge Gabriel Gorenstein said Bankman-Fried would require “strict” supervision following his release to his parents’ home in California.

His parents, both Stanford Law professors, were present in the courtroom. Bankman-Fried was flanked by two U.S. marshals, dressed in a blue suit and brown shoes. Bankman-Fried entered in ankle shackles as well, but traded them for his ankle monitor while in the courtroom."

"Bankman-Fried was the heart of “a fraud of epic proportions,” Assistant U.S. Attorney Nicolas Roos told the court. But he voluntarily returned to the United States, has no history of flight and has significantly reduced financial assets, Roos said.

Bankman-Fried had previously claimed that he was down to a mere $100,000, a steep fall from grace for a man who was once at the head of a $32 billion crypto empire."

"Bankman-Fried’s bail dwarfs other federal white-collar bonds. Bernie Madoff posted a $10 million bond while awaiting trial on his multibillion-dollar Ponzi scheme. Jeff Skilling, former Enron CEO, posted a $5 million bond, while Elizabeth Holmes, Theranos founder, posted a scant $500,000."

Total Amount Recovered

FTX's digital treasury includes significant holdings, such as $1.16 billion in Solana (SOL) and $560 million in Bitcoin (BTC), among other tokens.

The total amount recovered is still being determined. A recent court ruling has allowed FTX to start selling and staking assets in order to repay creditors.

Ongoing Developments

The sale of assets is still ongoing.

Bankruptcy Liquidation Of Exchange Assets

FTX Exchange has gained approval from the U.S. Bankruptcy Court to sell its cryptocurrency assets, which are valued at around $3.4 billion. This move is aimed at repaying its creditors and has garnered significant attention in the crypto market. The court's decision allows FTX to systematically sell, hedge, and stake its digital assets.

FTX had previously outlined its strategy, which includes hedging cryptocurrencies to protect against market fluctuations before selling assets like Bitcoin or Ether. They also plan to stake certain digital currencies to generate returns on dormant assets.

The ownership of these digital assets was a point of contention during the court discussions. FTX clarified that the assets in question belong to the debtors and cannot be traced back to individual stakeholders.

While there have been concerns about potential market volatility (FUD) due to FTX's decision to liquidate its crypto assets, the current market appears stable, with Bitcoin showing a 0.75% increase in the past 24 hours, trading at $26,129.05.

Individual Prevention Policies

No specific policies for individual prevention have yet been identified in this case.

For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.

Platform Prevention Policies

Policies for platforms to take to prevent this situation have not yet been selected in this case.

For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.

Regulatory Prevention Policies

No specific regulatory policies have yet been identified in this case.

For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.