But the industry hit rock bottom this week with the failure of FTX, one of the largest crypto exchanges in the world. Started by Sam Bankman-Fried in May 2019,
the journey of FTX has closely tracked that of the crypto sector — a meteoric rise, celebrity limelight, and regulatory scrutiny followed by an ultimate plummeting bringing the story to a full circle.
On Friday, 30-year-old
Bankman-Fried wrote on Twitter that FTX had filed for voluntary Chapter 11 proceedings in the US, meaning the firm was bankrupt and had failed to find anyone that could bail them out
“I’m really sorry, again, that we ended up here. Hopefully, things can find a way to recover. Hopefully, this can bring some amount of transparency, trust, and governance to them. Ultimately, hopefully, it can be better for customers,” he tweeted.
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How Sam Bankman-Fried fooled the crypto world and maybe even himself
Who is Sam Bankman-Fried and what is FTX?
Discover the stories of your interest
A son to two professors teaching at Stanford University in 1992, Sam Bankman-Fried, or SBF as would later go on to be called, was born in California and graduated with a major in Physics from the Massachusetts Institute of Technology in 2014. It was during this time that he also met Gary Wang, his close aide, and future business partner.
After completing his education, he worked with New York-Based Jane Street Capital – a quantitative trading firm and liquidity provider – as a trader dabbling between derivatives, currencies, and exchange-traded firms until 2017 when he went solo and started his crypto trading firm called Alameda Research.
Alameda also worked with digital asset products and their derivatives.
After running his trading firm for two years,
Bankman-Fried started the crypto exchange FTX in 2019 with Wang, a former engineer with Google. Both of them and FTX got deep into crypto tokens and derivatives, promising a robust risk management system.
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Soon, it brought on board Binance – the world’s largest crypto exchange as an investor. Between 2019 and 2022, FTX went on to become one of the largest exchanges in the world competing with Binance and Bankman-Fried developed a cult personality of sorts within the crypto-verse, with his wealth touching $17 billion at one point.
What has been FTX’s journey to the top?
Earlier this year, Bankman-Fried announced that FTX would enter into stock trading options after having successfully built the crypto exchange in a short period.
Bankman-Fried’s relationship with the media and the young investors thronging into the crypto world contributed the most to the behemothic rise of FTX in just three years. Also, he never shied away from taking a fight, mostly on Twitter though, evident from his recent response to Chao’s tweets on Binance liquidating all FTT tokens from its books.
In addition, Bankman-Fried was cheered by the who’s and who of the world ranging from singer Katie Perry, American football legend Tom Brady to NBA phenomenon Steph Curry. All of them added a lot of weight behind Bankman-Fried and the work he was doing, catapulting him to a renowned figure within the crypto and the overall financial sector.
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This helped FTX immensely as it shot to fame and at one point was the second-largest crypto exchanging clocking volumes of about $2 billion at its peak. Seeing the growth, FTX shifted its headquarters from Hong Kong to the Bahamas.
Interestingly, FTX was one of the largest donors to US politics in the 2022 election cycle, donating about $40 million, but mostly to Democrats. The focus was mainly on candidates who were ‘crypto-friendly’ in the Democratic primaries.
Like its peers, FTX aggressively recruited former federal regulators and Capitol Hill staffers.
What went wrong with FTX?
The latest crypto crash started with a report published by crypto-tracking website Coindesk, which claimed there was an unusually close relationship – more of a proxy front – between Bankman-Fried’s crypto exchange FTX and his trading firm Alameda Research.
The report suggested that most of FTX’s balance sheet had FTT tokens present in both assets and liabilities. This showed that the trading firm Alameda – a giant in its own right – had an exoskeleton made up of a coin invented by its sister company, with no other assets such as fiat currency or even other cryptocurrencies.
It thus
became evident that most of Alameda’s equity was made up of the FTT token, which raised several questions about the financial health and liquidity of FTX.
In came Binance’s Changpeng Zhao, who announced on Twitter that his firm would liquidate wherever FTT was left on its books, sending the token and the wider crypto world into meltdown.
“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion equivalent in cash (BUSD and FTT). Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books,” he tweeted.
However, the deal fell through within a day as Binance pulled the plug citing regulatory concerns and a major liquidity crisis.
What is the extent of loss?
Personally, Bankman-Fried lost over $15 billion of his net worth in the last seven days. At the peak, the 30-year-old was worth $26 billion, and he was still worth almost $16 billion at the start of the week.
The Information reported on Thursday that more than $500 million in funds was managed by Sequoia Capital and other venture capital firms and that he was also an investor in media startup Semafor.
Sequoia, which started betting big on cryptocurrencies earlier this year and launched a half-a-billion dollar fund to invest in crypto tokens, marked down its $150 million investment in FTX to $0.
SoftBank Vision Fund also had an exposure of $100 million in FTX, the fund executives mentioned during Friday’s earnings call when questioned. However, they said ‘there was no material impact on the fund’
FTX’s list of investors spans powerful and well-known investment firms: NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock and Thoma Bravo.
The New York Times reported that four FTX investors said they were shocked by the company’s sudden collapse. They said they properly researched the company’s financials, which showed a healthy, growing business that provided an easy-to-use platform for people to buy, sell and store crypto. However, they were completely in the dark about FTX’s possible self-dealing with Alameda
What happens next?
FTX said on Friday it was commencing bankruptcy proceedings in the United States and Bankman-Fried resigned from his role as chief executive officer.
This raises concerns about the future of the crypto industry, which faces an uphill task of regaining favor among retail investors after several blowups this year.
A Reuters report on Saturday claimed that at least $1 billion of customer funds had vanished from FTX, citing sources.
The report said Bankman-Fried secretly transferred $10 billion of customer funds from FTX to Alameda Research. A large portion of that total has since disappeared. The financial hole was revealed in records that Bankman-Fried shared with other senior executives last Sunday.
According to a WSJ report, the Securities and Exchange Commission and the Justice Department of the US are investigating FTX after this week’s bust.
The report adds that staff at the two law-enforcement agencies were in close contact with the company’s lawyers.
The SEC’s investigation, going on for months now, deals with the company’s US subsidiary FTX.US, which lists dozens of crypto tokens. Few agency officials, as per the report, believe some of these assets, as well as FTX’s lending product, might constitute securities that, under US law, should have been registered with the SEC before being sold to investors. And, if that’s the case, the problems would multiply for Bankman-Fried and FTX.
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