Written By: Ishwar Haridh
What started as the world’s third-largest cryptocurrency exchange, valued at over $30 billion, Sam Bankman-Fried’s Futures Exchange (FTX) swift downfall would taint the crypto world for years. Here is the story of the company's meteoric ascent and drastic demise that cast a shadow over the entire cryptocurrency ecosystem.
Sam Bankman-Fried, the man at the center of the whole scandal, started his career at the highly-touted quantitative finance firm Jane Street. Yet, the MIT graduate would later leave this role to co-found Alameda Research in 2017, a cryptocurrency trading firm based in California. Given the rapidly growing popularity of cryptocurrencies and the lack of adequate cryptocurrency trading framework and infrastructure, SBF’s first venture into the crypto world would prove immensely successful. For example, Alameda Research would make large sums through arbitrage trades in the crypto sphere. Taking advantage of the volatile crypto price, he would profit most notably from the high prices of Bitcoin in Japan and other parts of the world, as opposed to the relatively low price demanded in the United States. By purchasing Bitcoin in the U.S. and instantly selling it in foreign markets, SBF would make around 10% risk-free profits with each trade. Yet, once other hedge funds and investors caught wind of Bankman-Fried’s crypto arbitrage trading strategy, they also began to participate, making the process less profitable for Alameda. Though Alameda was able to reap the benefits of the crypto bull market at the time, SBF knew that continuously finding lenders and clients would prove challenging and time-consuming. With this in mind, SBF set its sights on establishing a cryptocurrency exchange to fund Alameda.
He thus launched FTX in 2018, an exchange offering unique and diverse services, including crypto derivatives. The exchange swiftly gained traction among traders, focusing on user experience and groundbreaking trading products, setting it apart from its competitors. SBF's aggressive marketing campaigns and his active involvement in the cryptocurrency community further enhanced FTX's visibility and reputation. Bankman-Fried created the FTT token to profit the firm further; Alameda Research acted as FTT’s primary market maker, setting prices for the FTT and being the primary buyer and seller of the token. The promised instantaneous liquidity upon demand, along with the discounts for using the token on the FTX platform, resulted in a soaring price and popularity of FTT. Everything seemed to be going great for FTX, Alameda, and SBF. Bankman-Fried gained more popularity in the public sphere, becoming a spokesperson and advocate for government regulations in the crypto sphere and speaking out against various crypto scams. FTX benefitted from SBF’s growing global recognition, raising billions in equity, partnering with various professional sports teams and leagues, and funding other crypto startups. Being a private company, however, much of the public was unaware of the dangerous workings behind the scenes that would ultimately lead to the collapse of this crypto giant.
During the collapse of various crypto exchanges and tokens in 2022, FTX sought to solidify itself as a strong, permanent force in this volatile industry, bailing and buying out failing crypto lenders. Yet, on November 2nd, 2022, a CoinDesk article shed light on the finances of Alameda and FTX, revealing that the two entities were far too closely tied than SBF had ever let on. It was revealed that Alameda held most of its assets in this FTT token, even using FTT as collateral. In other words, Alameda was backing its customers, promising them secure repayment of the loan with its own volatile token that they set the price for. The leaked financial statements
revealed that the corporation had $14.6 billion in assets, $3.66 billion of which was attributed to “unlocked FTT,” and $2.16 billion on the ledger being tied to “FTT collateral” (Allison). The publication of this article and the public revelation that Alameda was built on a foundation comprised of FTX’s coin resulted in mass panic and selling of FTT, with the token’s market cap dropping to “less than half a million as of Nov. 21,” (Ashmore). Consequently, FTX customers sought to withdraw their money all at once. The $6 billion in withdrawals resulted in the exchange losing billions and leaving them unable to repay their $8 billion owed. While FTX was originally going to be bailed out by their number one competitor, Binance, the deal was voided by Binance after further news regarding FTX’s negligence and illegal activities broke. Thus, by the 10th of November, SBF declared that Alameda was to shut down before FTX, Alameda, and other auxiliary entities filed for bankruptcy. Bahamian authorities arrested Bankman-Fried and seized FTX’s assets before extraditing him to be tried in the U.S. following charges from the Department of Justice, SEC, and CFTC. SBF was accused of wire fraud, securities fraud, money laundering, lying to investors, and faking financial statements to cover up their balance sheets. Despite pleading not guilty to all charges presented, Bankman-Fried was convicted on all counts on November 2nd, 2023.
Although all these events only took place in recent years, the repercussions of SBF’s actions on the crypto industry are already evident. FTX’s collapse was, understandably, followed by mass withdrawals from other cryptocurrency lenders; many firms with ties to FTX have since undergone bankruptcy and legal scrutiny. Additionally, the FTX scandal damaged the public perception of the crypto world, with various tokens and exchanges taking a hit. Investors and the general public have less faith in this ever-growing industry due to Bankman-Fried’s actions, and it can be viewed as a step backward in the journey for the global acceptance of cryptocurrencies and blockchain technology as the way of the future. However, not all the repercussions of FTX’s collapse are negative. Although FTX’s untrustworthiness, lack of transparency, and lack of regulation led to the loss of billions for the company and its customers, it has since spurred discussions for increased governmental regulation. For example, the ‘Markets in Crypto-Assets’ framework for the European Union has been established for the upcoming year, aiming to minimize risk and hold exchanges responsible for their actions. Only through these governmental frameworks and regulations through a centralized entity can confidence in the industry be restored, and similar disasters can be prevented.
The collapse of FTX and the downfall of SBF sent shockwaves through the cryptocurrency industry. The incident underscored the inherent risks associated with cryptocurrency investments and the potential for fraud and mismanagement within the industry. Yet, the lessons learned from the disaster can help pave the way for the adoption of cryptocurrencies in the years to come. Increased transparency and regulatory oversight within the cryptocurrency industry are vital in protecting investors and consumers and rebuilding confidence in the industry. The FTX and SBF saga is a cautionary tale in this evolving novel landscape. And while the industry holds immense potential for innovation and growth, the risks that accompany it are evident. Thus, as the cryptocurrency ecosystem matures, it is essential to prioritize transparency and regulatory frameworks to ensure the long-term stability and sustainability of the sector. Building the future of crypto on a foundation of trust and transparency is key to creating a safe and sustainable future in this industry.
Works Cited
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Tortorelli, Paige, and Kate Rooney. “Sam Bankman-Fried’s Alameda Quietly Used FTX Customer Funds for Trading, Say Sources.” CNBC, CNBC, 13 Nov. 2022, www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used
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