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.

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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[44].

[45]

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 final collapse took place over a 10-day period in November 2022.

Key Event Timeline - FTX Exchange Collapse and Bankruptcy
Date Event Description
May 2019 FTX Cofounded FTX was co-founded by Massachusetts Institute of Technology graduates Sam Bankman-Fried and Gary Wang in May 2019[43]. Bankman-Fried has a background in ETFs trading, while Wang’s time before FTX was spent working at Google[43].
October 2021 FTX Funds Raised By October 2021, FTX raised $25 billion in valuation through investments from Temasek, an investment firm owned by the Singaporean government, among others[43].
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[43]. 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[44].
September 22nd, 2022 10:46:15 AM MDT Sequoia Capital Puff Piece Sequoia Capital publishes a favourable article about Sam Bankman Fried about how he collapsed the kimchi premium, a price difference between Bitcoin in Asia and the rest of the world, making him a billionaire and a legend[46]. Trained at Jane Street, a high-frequency trading shop, SBF embraced effective altruism (EA), a philosophy combining moral and financial logic to maximize good. Inspired by EA founder Will MacAskill, SBF aimed to earn for charity. SBF's journey led to the creation of FTX, a crypto exchange valued at $32 billion. FTX became a beacon for legitimacy in crypto, attracting Sequoia Capital's attention. SBF's risk-neutral approach and commitment to ethical impact set him on a path to reshape the crypto landscape and philanthropy[46].
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 8th, 2022 12:33:56 PM MST Ignacio de Gregorio Article In a Medium article, Ignacio de Gregorio discusses the collapse of FTX and questions are raised about the repeated collapses in the Crypto market. The author reflects on the aftermath of a previous financial crash in May, triggered by the Terra / Luna collapse, which led to significant losses for investors. FTX, once a thriving Crypto empire, is now facing a catastrophic downfall, with its value plummeting by $15.6 billion. The article emphasizes the unprecedented nature of such collapses and prompts a critical examination of the issues within the Crypto industry[47].
November 9th, 2022 7:30:00 AM MST CZ Shares Internal Update CZ publishes a tweet which is being sent through the company[21].
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[48].
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[49]. Although most FTX customers are still unable to withdraw their funds, withdrawal activity totaling up to $7.2 million was observed[49]. FTX confirmed via Twitter that individuals within the Bahamas were allowed to withdraw funds[49]. FTX stated that it is actively working on enabling withdrawals for users worldwide[49]. A former FTX staff member, Zane Tackett, revealed on Twitter that he had a significant portion of his funds stored on the exchange[49]. 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[49]. This led to Tron (TRX) on FTX trading at approximately seven times the market price elsewhere[49]. FTX US, a separate entity, announced that trading "may be halted" in a few days but assured users that withdrawals will remain open[49]. Users were advised to close their positions as needed and await further updates[49].
November 11th, 2022 4:37:24 AM MST Sequioa Capital Article Removed Sequioa Capital removes the article they posted that portrays Sam Bankman Fried favourably[50].
November 11th, 2022 7:14:00 AM MST 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. All of this is announced in a tweet[51].
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[52]. 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[52]. 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[52].
November 12th, 2022 8:15:51 AM MST Reddit Discussion on Hacker Identity A Reddit thread[53] discusses hacked funds being transferred through Kraken and references a Twitter thread (which appears to have since been deleted)[54][55]. The community discusses the unfolding situation, expressing a mix of humor and skepticism. Some users propose casting ideas for a potential Netflix movie based on the events, while others comment on the apparent lack of skill or experience exhibited by the hacker. Speculations and jokes about the identity of the hacker, including references to FTX's CEO Sam Bankman-Fried, are prevalent.
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 14th, 2022 6:09:46 AM MST Exodus Reddit Thread A Reddit thread discusses the recent mass movement of Bitcoin to cold storage, as indicated by a surge in withdrawals to self-custody wallets, is being viewed as a bullish sign by the crypto community[56]. This shift away from exchanges is seen as a positive development, reflecting a growing preference for secure, long-term storage of Bitcoin. The move to cold storage is often associated with a commitment to hodling, and the reduction of Bitcoin available on exchanges could contribute to an increase in its value. However, some express concerns about potential increased volatility due to reduced liquidity on exchanges, and there are debates about the overall impact on the market. The trend is attributed to a combination of factors, including recent events, security concerns, and a broader desire for more control over one's assets[56].
November 17th, 2022 Bankruptcy Filing For FTX FTX completes a bankruptcy filing, along with 101 included debtors[43][57].
November 18th, 2022 Bahamas Asset Control Bahamian authorities take control of FTX assets held there.
November 20th, 2022 12:01:00 PM MST Breaking Down Fund Laundering Mario Nawfal provides a breakdown of the various techniques the hacker is using to launder their stolen funds[58]. The scammer is wrapping their ETH to RenBTC, which can then be withdrawn to the bitcoin blockchain[58].
November 21st, 2022 9:46:00 AM MST Hacked ETH Funds On The Move ETH wallets are reportedly continuing to move with hacked funds. The REN bridge is shut down by limiting the liquidity available for the hacker[59].
December 1st, 2022 10:03:00 AM MST Meme.com On Apology Meme.com publishes a video parody articulating how "sorry" Sam Bankman Fried is[60].
December 6th, 2022 4:30:00 AM MST NBC News Report Published NBC News reports that senator Elizabeth Warren, along with two Republican senators, have sent a request for information to Silvergate Bank regarding its relationship with FTX and entities associated with Sam Bankman-Fried, the founder of FTX. The request is related to FTX's recent collapse and allegations that customer funds were secretly transferred to Alameda Research. The letter raises concerns about Silvergate's role in these activities and questions the bank's vigilance in monitoring suspicious financial activities in client accounts, as required by banking regulations. Silvergate has until December 19 to respond to the senators' inquiry[61].
December 9th, 2022 6:15:00 AM MST Bloomberg Silvergate Article Published Bloomberg publishes an article on Silvergate. "Silvergate Capital Corp. was dealing with the same problem many small US banks face: How do you differentiate yourself when larger competitors do everything you do, only better?The solution it found was to focus on a sector other banks didn’t want to touch: cryptocurrency. Over the course of a decade, the La Jolla, California-based company transformed itself from a bank catering to small businesses into a publicly traded firm known for providing banking services to major crypto clients such as Coinbase Global Inc. and Gemini Trust Co. — as well as Sam Bankman-Fried’s FTX and Alameda Research."[62]
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[63].
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[64].
December 16th, 2022 10:12:52 AM MST Silvergate Class Action Lawsuit Reported Decrypt reports that Silvergate Bank, its holding company Silvergate Capital Corporation, and CEO Alan Lane are facing a class action lawsuit in the U.S. District Court for the Southern District of California. The lawsuit alleges that they aided and abetted fraudulent activities of the now-bankrupt crypto exchange FTX. Plaintiffs argue that Silvergate directly participated in the commingling of funds, improper transfers, and lending out of customer money. The lawsuit also claims that Silvergate made misleading statements about its platform's controls to detect money laundering. This lawsuit follows Silvergate's downgrade by Morgan Stanley and a letter from a group of senators, including Elizabeth Warren, seeking information about Silvergate's relationship with FTX and the Bankman-Fried entities. Silvergate has until December 19 to respond to the lawmakers[65].
December 17th, 2022 5:12:23 AM MST Aid And Abetment Lawsuit A class-action lawsuit has been filed against Silvergate Bank, Silvergate Capital Corporation, and Silvergate CEO Alan Lane regarding their relations with the now-bankrupt FTX and Alameda Research[66]. The lawsuit accuses Silvergate of "aiding and abetting" the fraud at FTX[67]. The lawsuit, filed by an investor, alleges that Silvergate directly assisted and encouraged FTX's fraud and breaches of fiduciary duty. The investor entrusted FTX with their cryptocurrency savings, which led to significant potential losses due to FTX's recent crisis. The lawsuit accuses Silvergate of being liable for its role in furthering FTX's investment fraud and fiduciary duty breaches and demands that Silvergate make the investors whole. Earlier, Senators Elizabeth Warren, John Kennedy, and Roger Marshall had also written to Silvergate, seeking information about its role in the FTX collapse and its relationship with FTX. Silvergate has until December 19 to respond to the lawmakers' inquiries[66]. The plaintiff claimed that he invested in FTX based on promises from the exchange that his digital assets would be securely stored and could be withdrawn in cash or exchanged for other assets. The lawsuit alleges that Silvergate had a clear view of the fraud at FTX but failed in its "duty of due diligence" and violated its know-your-customer and anti-money laundering duties. Silvergate's shares have declined significantly following the FTX collapse. Additionally, former basketball star Shaquille O'Neal revealed that he was just a paid spokesperson for FTX and did not believe in cryptocurrency, as he was named in a class action lawsuit against celebrities who promoted the cryptocurrency exchange[67]. TBD merge these together better.
December 19th, 2022 10:11:00 AM MST Robbins LLP Deadline Reminder Robbins LLP has reminded investors of the lead plaintiff deadline in the class action against Silvergate Capital Corporation. The lawsuit pertains to alleged violations of the Securities Exchange Act of 1934, specifically in connection with Silvergate's conduct between November 9, 2021, and November 17, 2022. The complaint accuses Silvergate of making false and misleading statements about its business prospects. Revelations about subpoenaed Silvergate bank records allegedly showing $425 million in transfers to South American money launderers prompted a significant drop in the company's stock price. Shareholders have until February 6, 2023, to file papers if they wish to participate as a lead plaintiff in the class action[68].
December 20th, 2022 2:24:03 AM MST The Wall Street Journal The Wall Street Journal reports that Silvergate Capital Corp. is currently reviewing transactions between FTX crypto exchange and Alameda Research, following the collapse of FTX. This scrutiny comes as regulators and prosecutors charged Sam Bankman-Fried, the founder of FTX, with fraud, alleging he used customer funds from FTX to support Alameda trades and his own extravagant lifestyle. Bankman-Fried has acknowledged directing FTX customers to deposit funds into Alameda accounts but denies committing fraud. The transactions between FTX and Alameda have become a central focus for investigations into the FTX collapse.[69]
December 21st, 2022 3:00:14 PM MST Nepotism Denial CryptoSlate reports that Silvergate CEO Alan Lane has denied allegations of nepotism before U.S. senators. The denial comes after Silvergate Capital underwent executive staffing changes in November, which involved Lane's son-in-law, Tyler Pearson, who was reassigned to a deputy role. This sparked questions about nepotism, given that Silvergate employs several of Lane's immediate family members, including his son and another son-in-law. While the change was linked to corporate restructuring and not performance issues, it raised concerns regarding Silvergate's connections with the bankrupt crypto exchange FTX. U.S. senators, including crypto critic Elizabeth Warren, have been seeking answers from Silvergate on these matters[70].
December 21st, 2022 3:20:00 PM MST The Wall Street Journal "Silvergate Capital Corp. Chief Executive Alan Lane told three U.S. senators there was no performance issue with his son-in-law and former chief risk officer, whose job was changed just as the crypto world started imploding last month."[71]
December 21st, 2022 8:51:00 PM MST Coffeezilla Game Over Coffeezilla tweets an image of Sam Bankman Fried being arrested with the caption "game over for the biggest fraudster of our generation"[72].
December 22nd, 2022 5:45:00 AM MST Lawsuit Press Release Published Law firm Levi & Korsinsky, LLP publishes a press release notifying investors in Silvergate Capital Corporation (NYSE: SI) of a class action securities lawsuit. The lawsuit is seeking to recover losses on behalf of Silvergate investors who were allegedly affected by securities fraud between November 9, 2021, and November 17, 2022. The complaint alleges that the defendants made false statements and/or concealed information regarding money laundering controls, customer engagement in money laundering exceeding $425 million, regulatory scrutiny, and misleading statements about the company's business. Investors who suffered losses have until February 6, 2023, to request appointment as lead plaintiff. There is no cost to participate, and Levi & Korsinsky has a track record of winning high-stakes cases in securities litigation[73].
December 22nd, 2022 6:59:15 AM MST Premarket Movement InvestorsObservers reports that the Silvergate stock is trading lower by 3.51% in pre-market trading[74].
December 22nd, 2022 Bail Bond Release Bankman-Fried is released on a $250 million bond, the largest in history, by a federal judge.
January 11th, 2023 9:54:55 PM MST BBC Reports $5 Billion Recovered BBC News reports that FTX has recovered over $5 billion in assets, according to an attorney for the firm[75]. However, it was noted in a US bankruptcy court that the extent of losses to customers is still unknown[75].
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[76][77].
September 14th, 2023 1:49:37 AM MDT Crypto News Flash Article Crypto News Flash reports FTX Exchange has now 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[77].
September 14th, 2023 7:44:52 AM MDT Traders Impacted By FTX Liquidation Video mentioning FTX liquidation and impact on the market[78].

Technical Details

FTX was a complicated mix of corporate entities.

Corporate Entities

Alameda Trading

Hacked Funds

TBD - more on [58][59].

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[52]. Customers were unable to withdraw funds, but trading on FTX's website and mobile app is functioning normally[52]. There were over $200 million in spot bitcoin trading volume and over $300 million in volume for bitcoin and ether perpetual contracts on FTX[52].

FTX's volumes have been declining since its bankruptcy filings[52]. While popular crypto trackers have removed FTX from their volume rankings, the exchange's markets remain operational[52]. This raises questions about why users would continue trading on an exchange when they can't withdraw their assets[52].

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[48][52]. 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[52].

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[52]. Although most FTX customers are still unable to withdraw their funds, limited withdrawal activity, totaling up to $7.2 million, was observed[49].

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[49]. A former FTX staff member, Zane Tackett, revealed on Twitter that he had a significant portion of his funds stored on the exchange[49]. FTX stated that it is actively working on enabling withdrawals for users worldwide[49].

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[52]. NFTs with no utility reportedly saw significant sales[52].

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[49].

This led to a situation where Tron (TRX) on FTX was trading at approximately seven times the market price elsewhere[49].

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[49]. Users were advised to close their positions as needed and await further updates[49].

Reactions On Twitter

[79][80]

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

Former FTX CEO Sam Bankman-Fried is facing accusations of orchestrating a major fraud, but he has pleaded not guilty. Most of FTX's customers and investors who are facing losses have not been named in the hearings, but high-profile individuals like American football star Tom Brady, his former wife Giselle Bündchen, and New England Patriots owner Robert Kraft were mentioned in court filings. Bankman-Fried has been accused of misappropriating customer funds to pay debts and make investments[75].

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."

Silvergate Class Action Lawsuit

The CryptoTimes report that a class-action lawsuit had been filed against Silvergate Bank, Silvergate Capital Corporation, and Silvergate CEO Alan Lane regarding their relations with the now-bankrupt FTX and Alameda Research. The lawsuit, filed by an investor, alleges that Silvergate directly assisted and encouraged FTX's fraud and breaches of fiduciary duty. The investor entrusted FTX with their cryptocurrency savings, which became uncertain and led to significant losses due to FTX's recent crisis. The lawsuit accuses Silvergate of being liable for its role in furthering FTX's investment fraud and fiduciary duty breaches and demands that Silvergate make the investors whole. Earlier, Senators Elizabeth Warren, John Kennedy, and Roger Marshall had also written to Silvergate, seeking information about its role in the FTX collapse and its relationship with FTX. Silvergate has until December 19 to respond to the lawmakers' inquiries[66].

CryptoSaurus reports that Silvergate, a leading crypto bank, is facing a class action lawsuit filed by investors affected by the collapse of FTX. The lawsuit accuses Silvergate of "aiding and abetting" the fraud at FTX. The plaintiff claimed that he invested in FTX based on promises from the exchange that his digital assets would be securely stored and could be withdrawn in cash or exchanged for other assets. The lawsuit alleges that Silvergate had a clear view of the fraud at FTX but failed in its "duty of due diligence" and violated its know-your-customer and anti-money laundering duties. Silvergate's shares have declined significantly following the FTX collapse. Additionally, former basketball star Shaquille O'Neal revealed that he was just a paid spokesperson for FTX and did not believe in cryptocurrency, as he was named in a class action lawsuit against celebrities who promoted the cryptocurrency exchange[67].

Silvergate Bank, its holding company Silvergate Capital Corporation, and CEO Alan Lane are facing a class action lawsuit in the U.S. District Court for the Southern District of California. The lawsuit alleges that they aided and abetted fraudulent activities of the now-bankrupt crypto exchange FTX. Plaintiffs argue that Silvergate directly participated in the commingling of funds, improper transfers, and lending out of customer money. The lawsuit also claims that Silvergate made misleading statements about its platform's controls to detect money laundering. This lawsuit follows Silvergate's downgrade by Morgan Stanley and a letter from a group of senators, including Elizabeth Warren, seeking information about Silvergate's relationship with FTX and the Bankman-Fried entities. Silvergate has until December 19 to respond to the lawmakers[65].[74]

Court Trial And Sentencing

Sam Bankman Fried was ultimately tried and found guilty of seven different crimes.

The trial consisted of a large number of witnesses on the prosecution side, with Sam Bankman Fried only able to produce one witness along with himself. The central attempt at justifying the events was by trying to demonstrate that enough customers had agreed to a terms of service allowing for the usage of their funds in margin trading. After a 3 hour deliberation, the jury found Sam Bankman Fried guilty on all counts.

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[77].

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[76].

CryptoSlate reports that Silvergate CEO Alan Lane has denied allegations of nepotism before U.S. senators. The denial comes after Silvergate Capital underwent executive staffing changes in November, which involved Lane's son-in-law, Tyler Pearson, who was reassigned to a deputy role. This sparked questions about nepotism, given that Silvergate employs several of Lane's immediate family members, including his son and another son-in-law. While the change was linked to corporate restructuring and not performance issues, it raised concerns regarding Silvergate's connections with the bankrupt crypto exchange FTX. U.S. senators, including crypto critic Elizabeth Warren, have been seeking answers from Silvergate on these matters[70].

Ongoing Developments

The sale of assets is still ongoing[76].

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.[77]

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.[77]

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.[77]

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.[77]

Liquidation Impacts On Market

[44]

Individual Prevention Policies

The FTX platform did not back customer funds for the majority of it's existence. No audits nor proof of backing was made available, and customers continued to blindly trust FTX without any confirmation that their funds were backed right up into the final collapse. Customer assets were freely used as collateral and to buy up other companies, a position which proved extremely risky in the final market downturn. Individuals can avoid a similar fate by self custodying their assets or choosing only to use platforms with proven backing of funds.

When using any third party custodial platform (such as for trading), it is important to verify that the platform has a full backing of all assets, and that assets have been secured in a proper multi-signature wallet held by several trusted and trained individuals. If this can't be validated, then users should avoid using that platform. Unfortunately, most centralized platforms today still do not provide the level of transparency and third party validation which would be necessary to ensure that assets have been kept secure and properly backed. Therefore, the most effective strategy at present remains to learn proper self custody practices and avoid using any third party custodial platforms whenever possible.

Store the majority of funds offline. By offline, it means that the private key and/or seed phrase is exclusively held by you and not connected to any networked device. Examples of offline storage include paper wallets (seed phrase or key written down and deleted from all electronic media), hardware wallets, steel wallet devices, etc...

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

Platform Prevention Policies

As in most cases of funds going missing from large platforms, the problems started long before the final collapse and reveal. Funds disappeared over a long period of time, with extremely limited accountability or visibility into the backing of funds. Having such visibility into the backing would have heavily limited the size of FTX and discouraged further usage of client funds.

In addition, while FTX had a wide diversity of corporations, decisions regarding the usage of funds tended to be made by Sam Bankman Fried himself. There were no alternative decision makers who had any degree of ability to put up reasonable resistance, much less a multi-signature wallet with keys held by separate individuals. Such a system where one person is in charge of all decisions is obviously vulnerable to full exploitation by that person.

All aspects of any platform should undergo a regular validation/inspection by experts. This validation should include a security audit of any smart contracts, reporting any risks to the backing (of any customer assets, ensuring treasuries or minting functions are properly secured under the control of a multi-signature wallet, and finding any inadequacies in the level of training or integrity of the team. The recommended interval is twice prior to launch or significant system upgrade, once after 3 months, and every 6 months thereafter. It is recommended that the third party performing the inspection not be repeated within a 14 month period.

All wallets, minting functions, and critical infrastructure should be implemented with a multi-signature requirement, with a recommended minimum of 3 signatures required. This means that making important changes or approving spending will require the keys held by at least 3 separate individuals within the organization to approve. The multi-signature should be implemented at the lowest layer possible, all key holders should have security training, and all key holders should be empowered and encouraged to exercise diligence.

Work with other industry platforms to set up a multi-signature wallet with private keys held separately by delegate signatories from seven prominent platforms and services within the industry. Establish requirements for contributions by all platforms and services, designed to be affordable for small platforms yet large enough to cover anticipated breach events. Any breach event can be brought forth by a member platform or a petition of 100 signatures for consideration by the delegate signatories. A vote of 4 or more delegate signatures is required to release any funds, which could partially or fully restore lost funds based on their assessment.

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

Regulatory Prevention Policies

As in most cases of funds going missing from large platforms, the problems started long before the final collapse and reveal. Funds disappeared over a long period of time, with extremely limited accountability or visibility into the backing of funds. Having such visibility into the backing would have heavily limited the size of FTX and discouraged further usage of client funds.

In addition, while FTX had a wide diversity of corporations, decisions regarding the usage of funds tended to be made by Sam Bankman Fried himself. There were no alternative decision makers who had any degree of ability to put up reasonable resistance, much less a multi-signature wallet with keys held by separate individuals. Such a system where one person is in charge of all decisions is obviously vulnerable to full exploitation by that person.

All platforms should undergo published security and risk assessments by independent third parties. Two assessments are required at founding or major upgrade, one after 3 months, and one every 6 months thereafter. The third parties must not repeat within the past 14 months. A risk assessment needs to include what assets back customer deposits and the risk of default from any third parties being lent to. The security assessment must include ensuring a proper multi-signature wallet, and that all signatories are properly trained. Assessments must be performed on social media, databases, and DNS security.

Set up a multi-signature wallet with private keys held separately by delegate signatories from seven prominent platforms and services within the industry. Establish requirements for contributions by all platforms and services within the country, designed to be affordable for small platforms yet large enough to cover anticipated breach events. Any breach event can be brought forth by a member platform or a petition of 100 signatures for consideration by the delegate signatories. A vote of 4 or more delegate signatures is required to release any funds, which could partially or fully restore lost funds based on their assessment.

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

References

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  39. SEC Charges Caroline Ellison and Gary Wang with Defrauding Investors in Crypto Asset Trading Platform FTX - Reddit (Sep 14, 2023)
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