FTX Crash: Timeline, Fallout and What Investors Should Know

On Nov. 11, FTX, a major cryptocurrency exchange, announced it had filed for Chapter 11 bankruptcy in the U.S. Its former founder and CEO Sam Bankman-Fried was arrested on Dec. 12 in the Bahamas after being indicted on eight criminal charges that include wire fraud and conspiracy to defraud investors.

The SEC recently filed a complaint against Bankman-Fried, claiming that he used customer funds to finance his personal investments in real estate and political campaign donations.

The Severity of FTX’s Financial Struggles Revealed in New CEO’s Bankruptcy Filing

John J. Ray III, the new CEO of FTX and former leader of Enron, filed for bankruptcy on Nov. 17th. This filing allowed insights into the true state of FTX’s finances which have been consistently kept murky by the company up to this point. The filing cites a “complete failure of corporate controls” and an overall “absence of trustworthy financial information.”

FTX’s crash has had serious implications for other cryptocurrencies and exchanges that are linked to FTT or FTX, as they face falling prices and financial difficulties.

What happened to FTX?

FTX and FTX.US went under because of insufficient funds and management, then a lot of investors requested their money back. The value of FTX’s currency, FTT, dropped significantly, taking other coins like Ethereum and Bitcoin down with it. currently at a two-year low as of Nov. 9th . Many other exchanges have been damaged by the FTX fiasco including BlockFi, who filed for bankruptcy on Nov. 28th.

These are the key points:

Initial reports and sell-offs: Nov. 2 to 8

FTX was a cryptocurrency exchange founded by Sam Bankman-Fried in 2019. He served as CEO until the company’s shutdown in Nov. 11. The exchange had its own token, FTT, and was once the fourth-largest crypto exchange by volume.

Bankman-Fried also founded a crypto trading firm called Alameda Research. According to CoinDesk’s Nov. 2 report, its largest assets are billions of dollars worth of FTT.

On Nov. 6, the CEO of Binance, Changpeng Zhao (CZ), tweeted that he was considering selling off all of Binance’s FTT because of recent information commercialized about FTX and Alameda Research–namely their confusing funds situation. He likened FTX’s issue to the market crash caused by TerraUSD and LUNA earlier this year which cost investors billions dollars; though usually such decisions aren’t made public knowledge beforehand.

Suspicion that FTX didn’t have the liquidity to support transactions caused Zhao’s announcement to result in a sharp decline of FTT’s value over the next day. The value of other coins, including BTC and ETH also dropped as a result, with Bitcoin reaching a two-year low. Bankman-Fried said in a tweet on Nov. 10 that $5 billion was withdrawn from the platform on Nov. 6 alone.

Withdrawals freeze, a deal falls through: Nov. 8 to 11

Zhao and Bankman-Fried arranged for Binance to buy the non-U.S. part of FTX in order to stop an even bigger market crash from happening. To agree on this, they signed a Nonbinding Letter of Intent on Nov 8th .

On Nov. 8, FTX stopped all customer withdrawals that weren’t in fiat currency. Bankman-Fried took to Twitter to apologize for the liquidity issues and promised more transparency going forward.

Binance pulled out of its acquisition deal with FTX on Nov. 9. Zhao announced the decision on Twitter, stating that Binance had completed its due diligence and would not be going through with the purchase. He attributed his choice to recent negative news reports involving FTX, including mishandled customer funds and alleged U.S. investigations . Bankman-Fried responded to Zhao’s tweet with a post of his own, saying simply, “Well played; you won.”

Bankruptcy and hacks: Nov. 11

On Nov. 11, FTX announced that it had filed for Chapter 11 bankruptcy proceedings for FTX, FTX.US and Alameda. This type of bankruptcy allows businesses to continue operations by restructuring their debt, as opposed to Chapter 7 bankruptcy where assets are liquidated .

FTX.US froze withdrawals on Nov. 11, following FTX’s bankruptcy announcement, despite assuring customers that FTX.US would not be affected by FTX’s liquidity issues earlier. Withdrawals have since been reopened.

According to CoinDesk, the FTX and FTX.US wallets were emptied on Nov. 11 in a hack, with over $600 million being taken from the wallets. Posting about the hack on its support channel Telegram, FTX stated: “FTX has been hacked. FTX apps are malware. Delete them.” The company went on to warn users not to go onto the website as it may downloadTrojans, which are malicious software that disguises itself as legitimate software programs..

Hackers tried to access bank accounts linked to FTX.US, as reported by a Twitter user. Plaid, a service used to connect customer bank accounts with financial applications, immediately shut off FTX’s access after seeing these “concerning public reports.” They noted that there was no indication their tools were used fraudulently.

On the evening of the hack, FTX general counsel Ryne Miller took to Twitter to announce that the company would be moving all assets offline into cold storage.

The aftermath: Nov. 12 to present

FTX published their balance sheet on Nov. 10, days before the Financial Times got ahold of it and revealed some concerning information. $9 billion in liabilities and only $900 million in assets that could be sold easily was found, as well as a hidden account with an even more alarming negative balance of $8 billion.

FTX is currently under a criminal investigation by the Bahamas, where FTX is based. According to Bankman-Fried’s former colleagues that were interviewed by CoinDesk, only those in his inner circle who lived with him and helped run his businesses knew about the entangled finances of these companies. These nine people included both current and previous romantic partners.

Ray, the new CEO, described FTX’s dire financial circumstances in a Nov. 17 filing with the U.S. Bankruptcy Court for the District of Delaware. He goes on to say that FTX did not maintain “appropriate books or records, or security controls,with its digital assets.”

The emergency motion filed on Nov. 17 by FTX claimed that there is evidence to suggest that Bahamian regulators directed Bankman-Fried to unlawfully access and transfer funds from FTX to the government. The release of a press statement from the Securities Commission of Bahamas seemingly affirms these reports though it’s still unknown when or if these transfers occurred, as they would have taken place around the same time as the hack happened.

The U.S government requested the arrest of Bankman-Fried on Dec. 12 on behalf of eight charges including wire fraud and conspiring to defraud investors. Prior to his scheduled testimony in front of the House Financial Services Committee, he was arrested and will no longer be testifying. FTX CEO John J Ray III will testify instead.

What does this mean for U.S. customers?

FTX.US filed for Chapter 11 bankruptcy, according to the press release. The companies want to “maximize recoveries for stakeholders,” said Ray, the new CEO of FTX, in the statement. But as of right now, there is no guidance available for investors who are affected by this filing.

FTX is in debt to its customers, owing them billions of dollars. In a court filing on Nov. 19, FTX listed its top creditors, the investors to whom the fallen exchange owes money. The exchange owes its 50 top creditors almost $3.1 billion combined, with slightly over half of that amount ($1.45 billion) owed to just the 10 top ones. The company could have over a million individual creditors and has been in contact with “dozens” of international financial regulators according to CNN reports .

In the filing, Ray warned investors that a “substantial portion” of assets held with FTX may be missing or stolen. He cautioned that it would not be appropriate for stakeholders or the Court to rely on FTX’s audited financial statements as an accurate portrayal of its true financial circumstances.

FTX is evaluating its assets and preparing to either sell them or restructure the company in order to repay investors. The balance sheets included in the bankruptcy filing portray that FTX’s assets are worth significantly less than what Bankman-Fried had initially led people to believe.

In the near future, it will be difficult for users to receive their money back. Platform investors who had stored assets on FTX still couldn’t withdraw their funds as of Tuesday, November 22.

What does this mean for the U.S. crypto market?

The implications of FTX’s issues have been widespread throughout the U.S. crypto market:

• The price of Bitcoin fell below $16,000 on Nov. 9 and 14 respectively. Moreover, $3.2 billion in Bitcoin was withdrawn from exchanges between Nov. 8-15th.
• On Nov. 9, Ethereum‘s price dropped below $1,100.
• Solana‘s value dropped sharply after CoinDesk reported that Alameda had a large amount of it, with applications on the Solana network losing around $700 million in assets. It then dipped below $13 again just a few days later.
• On Nov. 10, Tether briefly dropped 3% from the U.S. dollar.

Because cryptocurrency is a high-risk investment, you shouldn’t put all your money into it. You should only invest a small amount of money that you’re willing to lose and buy different types of cryptocurrency to help offset the risk.

Which exchanges are exposed to the FTX crisis?

Given the recent market volatility, and reports of customers being unable to withdraw their funds from FTX, investors are concerned about what will happen to their assets on other exchanges. Here is how some major exchanges have been affected:

FTX and FTX.US have halted customer withdrawals and filed for Chapter 11 bankruptcy protection amid SEC scrutiny. FTX is being investigated by the Securities and Exchange Commission, or SEC, and Commodity Futures Trading Commission over its handling of client funds, Reuters reported. The inquiry began several months ago but hasn’t yet received a response from FTX.

Due to BlockFi’s loan of $275 million to FTX US, it has been forced to file for Chapter 11 bankruptcy. According FTX’s balance sheet, this is only a smallAsset And Liability amongst their other assets and liabilities which range from $1 billion upwards of $10 billion.

On Nov. 9, Gemini co-founder Cameron Winklevoss tweeted that the platform had no material exposure to FTX, FTT or Alameda; however, three days later on Nov. 16, Gemini told customers they might not be able to withdraw funds from Gemini Earn–a program where users gain upward of 8% rewards on assets lent out. The hitch is with Genesis Global Capital–Gemini’s third-party lending partner–who has put a stop totemporarily withdrawals due to their own liquidity concerns.

Kris Marszalek, the CEO of Crypto.com, has stated that their company’s exposure to the recent FTX meltdown is less than $10 million, which he says is immaterial. The platform did suspend withdrawals of stablecoins USD and USDT on the Solana network but did not give an explanation for why they did so.

Binance.US, the U.S.-based branch of Binance, clarified on Twitter that Binance’s dealings with FTX would not have any impact on American users. Zhao also announced yesterday that the exchange would be creating an “industry recovery fund” to assist strong projects experiencing liquidity issues.

In a tweet, Coinbase CEO Brian Armstrong said that the platform has no significant exposure to FTX, FTT or Alameda.

NerdWallet asked Robinhood if the service had any exposure to Alameda, FTX, or its entities. They responded that FTT can’t be traded on their platform and that FTX’s Bankman-Fried has a 7.6% stake in Robinhood.

EToro assured NerdWallet that the platform has no business relations to FTX or FTT. Users can trade FTT on EToro; however, this isn’t possible for U.S. users.

Kraken told CoinDesk that the platform has no exposure to FTX or Alameda and does not support FTT trading.

Both TradeStation and Webull have yet to give a statement in response to NerdWallet’s inquiry.

I’m worried about keeping my crypto with an exchange. What should I do?

One way to safeguard your digital assets is by transferring them into a crypto wallet. Most exchanges enable you to do this, and the wallets can either be online on another platform or offline with added security measures. Even though holding your cryptocurrency in this manner won’t stop prices from dropping, it could protect you against an exchange freezing withdrawals or closing its withdrawal window.

How will this affect crypto regulation?

Recently, more regulatory examination might be placed on international exchanges because of recent events. On Nov. 11, in a Twitter post, Sen. Elizabeth Warren from Massachusetts said she was pushing for the SEC’s protection of consumers and called for more aggressive enforcement .

Conclusion

• FTX, a major cryptocurrency exchange, filed for Chapter 11 bankruptcy on Nov. 11.
• FTX’s former founder and CEO Sam Bankman-Fried was arrested on Dec. 12 in the Bahamas and will be extradited to the U.S., where he faces eight criminal charges including wire fraud and conspiracy to defraud investors.
• The new CEO of FTX is John J. Ray III, who led the infamous energy giant Enron through its bankruptcy and liquidation process about two decades go.
• FTX’s crash has wide-reaching implications throughout the crypto market, as cryptocurrencies and exchanges with exposure to FTT or FTX face sinking prices