What do we know so far about the collapse of cryptocurrency exchange FTX? | Cryptocurrencies

The bankruptcy of FTX, one of the world’s largest cryptocurrency exchanges, has caused yet another volatility in the highly speculative digital asset market. FTX founder Sam Bankman-Fried’s fortune went from nearly $16 billion to zero in a matter of days as his crypto empire filed for bankruptcy protection in the US on November 11. So far, we’ve answered some of your questions about the story.

How was FTX established and what was its business model?

In corporate terms, FTX was a chaotic network of more than 100 different companies, all united under the common ownership of Bankman-Fried and its co-founders Gary Wang and Nishad Singh. In his bankruptcy filing, John Ray III, the American bankruptcy expert who previously oversaw Enron’s collapse, described it as having four main “silos”: the venture capital arm, which invests in other businesses; a hedge fund that trades crypto for profit; and two exchanges, one ostensibly ringfed and regulated for a US audience, and the other an international exchange where the rules are looser.

The revenue streams were as diverse as the business, but the core of the group was exchange. Most people buy cryptocurrency by transferring money (“fiat”) to an exchange like FTX, which acts as a bureau de change and trades currency pairs at a floating rate. The regulated exchange of FTX offered this service and the company took a cut from each transaction, but the big money was in more aggressive trading on the international exchange, where traders will try to profit from changes in the price of cryptocurrencies, borrowed money. to maximize their potential gains (or losses). The more complex the trade, the bigger the cutoff.

Why did it crash?

Due to a token called FTT shortly. It was a stake in FTX that the company itself issued and promised to buy back using part of its earnings. But documents leaked to news website CoinDesk suggested that Alameda, the group’s hedge fund, was using FTT to make risky loans – effectively trading using company script. The revelation prompted rival exchange Binance, the main owner of FTT, to announce that it was selling its shares, prompting a run on the exchange as other customers tried to withdraw their funds.

In the medium term, it collapsed due to deeper problems with the connection between FTX and Alameda. The exchange did not have the ability to accept wire transfers, so customers would send money to Alameda and FTX would credit their accounts. But the actual money was never transferred: three years later, Alameda held, traded, and often lost $8 billion in FTX client funds. When the run on the stock market began, FTX could not find the money it thought it would, because it never took it.

In the long run, FTX failed because the company was a mess. “Never in my career have I seen such a complete failure of corporate control and complete absence of reliable financial information as occurred here,” said bankruptcy attorney Ray.

What does the fate of FTX tell us about cryptocurrencies?

Different conclusions were drawn within the sector. Some have argued that the collapse is a triumph for “decentralized finance,” or DeFi, which uses computer code to create versions of financial services that don’t rely on trust or a central party. The head of a DeFi exchange can’t buy a $40 million penthouse with client funds because he doesn’t have a head.

But outside the sector, the result is clear. Cryptocurrencies are a bet on the idea that a world would be better off with an end to government control over money and finance: the collapse of the FTX is, in fact, perfect proof that government regulation of finance is quite beneficial.

Will people get their money back?

Some people will get their money back, but no one will get everything. Even Bankman-Fried is convinced that $8 billion in capital would be needed to make every depositor whole. But the reports provided by Ray make it clear that this is wishful thinking. He says there is not a single document detailing all of the company’s depositors, and while the balance sheet suggests a healthy mix of assets and liabilities, “I don’t believe that, and the information there may not be true to begin with. the date is specified”.

Robert Frenchman, a partner at the New York law firm Mukasey Frenchman, said that in the US, FTX clients whose money is stuck in a failed business will have to join the ranks of creditors because there are no special protections for clients of unregistered crypto companies like FTX.

“Unlike bank or brokerage account holders, there is no backstop here for clients in the US. Clients will have to fight everyone because they have no special protection. They go into this process as individual creditors or, if they join together, as a group of creditors who must contend with legions of other creditors, large and small.”

Meanwhile, the U.S. Attorney’s Office for the Southern District of New York is handling the case, and U.S. Treasury Secretary Janet Yellen has said cryptocurrency markets need stronger oversight.

Could there be contagion in cryptocurrency markets?

There are already signs of a spillover effect. BlockFi, a crypto lender that was rescued by FTX over the summer, admitted it had “significant exposure to FTX” and halted customer withdrawals. On Wednesday, cryptocurrency exchange Genesis “made the difficult decision to temporarily suspend payments” from the company’s lending business after a series of withdrawals from the service.

This week, the CEO of Singapore-based cryptocurrency exchange Crypto.com said his company will prove wrong those who say the platform is in trouble, adding that it has a solid balance sheet and is not taking any risks. Kris Marszalek made the announcement after investors questioned the October 21 transfer of $400 million worth of ether tokens from Crypto.com to another exchange called Gate.io. Marszalek said the transfer was a mistake and the ether tokens were returned to the exchange.

Crypto market watchers expect more volatility, although major cryptocurrency bitcoin continued to hold steady at around $16,700 this week.

Teunis Brosens, head of regulatory analysis at Dutch bank ING, said the crisis will “definitely deepen” the recent crypto winter, which saw the value of the cryptocurrency market fall from $3 trillion last year to less than $1 trillion now.

“In terms of prices, we’ve seen bitcoin pretty stable around $19,000 to $20,000 for months. I would think that we will now look for stability at lower levels – but first the storm has to subside and we are not there yet.

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