Legal Name: FTX Trading Ltd
FTX is a bankrupt cryptocurrency exchange and hedge fund. At its peak, in 2021, it had over 1 million users and was the third largest exchange by volume. It is incorporated in Antigua and Barbuda and headquartered in the Bahamas.
The firm offering many trading instruments including:
- derivatives
- options
- volatility products
- leveraged tokens
In 2022, it was reported that the exchange was doing over $10 billion per day.
On November 11, 2022, the company filed bankruptcy and Sam Bankman-Fried stepped down as CEO. The company was taking customers funds, transferring them to it Alameda arm, which engaged in leverage trading. This ultimately led to a liquidity crisis where there was not the money, due to losses, to cover the withdrawal requests from customers.
The events that led to the bankruptcy, and aftermath, led many to conclude this was nothing more than a Ponzi scheme. Bankman-Fried is facing charges from a number of entities over the firm's conduct.
On December 12, 2022, founder Sam Bankman-Fried was arrested by the Bahamian authorities for financial offences, at the request of the US government.
History of FTX
Sam Bankman-Fried and Zixiao "Gary" Wang founded the company in 2019. Bankman-Fried is an former Wall Street trader while Wang was formerly of Google. It was part of Alameda Research, a firm founded by Bankman-Fried and Caroline Ellison, which they set up in 2017. The firm quickly got some attention.
Changpeng Zhao of Binance purchased a 20% stake in FTX for approximately $100 million, six months after Bankman-Fried and Wang started the firm. He was eventually bought out for $2 billion by Bankman-Fried.
In August 2020, FTX acquired Blockfolio, a cryptocurrency portfolio tracking application. The price was $150 million was paid in cash, cryptocurrency and equity. The goal was to expand the business the company did with retail investors.
By July 2021, the company had a valuation of $18 billion. It raised $900 million in venture capital from more than 60 investors, including Softbank, Sequoia Capital, and other major technology investment firms.
In October 21, it did a capital raise, putting the value of FTX at $25 billion.
BlockFi
On July 1, 2022, FTX received an option to buy troubled cryptocurrency lender Blockfi. The price was a maximum of $240 million with no minimum price set. The company also agreed to increase its revolving credit line to $400 million.
BlockFi ran into issues during the crypto bear market where many firms that were overextended ended up filing bankruptcy.
Downfall of FTX
The fallout from the collapse of Terra-Luna led to the bankruptcies of many cryptocurrency lenders. FTX buying out BlockFi placed it as one of the stronger firms.
On November 2, 2022, leaked documents from Alameda Research showed the relationship between the trading firm and FTX was closer than most were led to believe. It was revealed a large amount of the trading firm's assets held in the FTX native token, FTT.
Essentially, billions of dollars of Alameda's value can be traced to a cryptocurrency that FTX creates.
A few days later, on November 6th, CZ announces Binance will sell off its holdings of FTT. It emerges that Alameda would like to buy the tokens at a price of $22, a move that causes it to fluctuate. It moved up to 10% and dipping below $22 for periods during that day.
November 8th: The price of FTT drops to $6 and CZ reveals he has an option to buy FTX, based upon a review of the financial statements.
November 9th: Bloomberg reports federal agencies in the US are investigating FTX.
November 10th: Bankman-Fried announces that Alameda will shut down. Regulators in the Bahamas freeze FTX assets.
November 11th: FTX, FTX.us, Alameda and dozens of subsidiaries file for bankruptcy in the US.
Bankman-Fried resigns as CEO and is replaced by John J. Ray III, who oversaw the Enron liquidation.
According to its bankruptcy filing, FTX had $8 billion of liabilities it can't pay to as many as 1 million creditors.
On Dec. 13, 2022, Ray III told a U.S. House of Representatives committee hearing that FTX appeared to be a case of "old-fashioned embezzlement" and that investors and creditors are unlikely to get all their money back.
Indictment of Sam Bankman-Fried
The U.S. Attorney for the Southern District of New York, Damian Williams, announced on Dec. 13 an eight-point fraud indictment against Sam Bankman-Fried that alleges the former CEO defrauded investors of FTX and lenders to FTX-affiliated hedge fund Alameda Research and violated campaign finance laws.
On December, 22, 2022, eight counts were filed in the U.S. District Court in Manhattan against Bankman-Fried. He was released from custody based upon the agreement of a $250 million bond.
Part of the condition was for him to be confined to the Northern California area, wear an electronic monitoring bracelet, and submit to mental health and substance abuse counseling.
On January 3, 2023, Bankman-Fried pleaded not guilty to the follow charged:
- fraud
- conspiracy
- campaign finance law violations
- money laundering
The trial is set for October 2, 2023. If convicted, he could face up to 115 years in prison.
Celebrity Affiliations
FTX established affiliations with a number of celebrities. Since the downfall, this has led to a number of issues, including some lawsuits by the Security and Exchanges Commission (SEC).
They included:
- Stephan Curry
- Tom Brady
- Shaquille O'Neal
- Kevin O'Leary
They were paid to promote the company or to help establish partnerships with other entities.
It also had relationships with Major League Baseball, University of California-Berkeley, and the Miami Heat.