FTX | The crypto empire that fell

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The crypto exchange founded by Sam Bankman-Fried imploded after revelations about its financial dealings with affiliated trading firm Alameda

The crypto exchange founded by Sam Bankman-Fried imploded after revelations about its financial dealings with affiliated trading firm Alameda

Famed celebri­ty inter­view­er David Ruben­stein intro­duced Sam Bankman-Fried as “one of the most suc­cess­ful cryp­to entre­pre­neurs in the world” on his talk show in August. Often called ‘crypto’s white knight’, the CEO of cryp­to exchange FTX was seen as a sav­iour of dig­i­tal assets indus­try, giv­ing life­lines to plat­forms fac­ing immi­nent col­lapse. On Fri­day, the 30-year-old billionaire’s cryp­to empire crum­bled.

A physics grad­u­ate from Mass­a­chu­setts Insti­tute of Tech­nol­o­gy, Mr. Bankman-Fried began his career in 2014 in Jane Street that spe­cialis­es in ETF and high-fre­quen­cy trad­ing in 2014. Three years lat­er, he took the plunge into the cryp­to world by set­ting up a Hong Kong-based invest­ment fund Alame­da Research that trad­ed in cryp­to tokens and deriv­a­tives. His rise coin­cid­ed with the boom in the cryp­tocur­ren­cy. In 2017, after years of price fluc­tu­a­tions between $100 and $900, bit­coin breached $1,000. By mid-May, its val­ue dou­bled; and by the end of the year, the de fac­to cryp­to bench­mark asset was trad­ing at $20,000.

Read | The rea­sons behind the crash­ing cryp­to market

But the cryp­tocur­ren­cy was not trad­ed at the same price on dif­fer­ent cryp­to exchanges. Mr. Bankman-Fried’s Alame­da saw an arbi­trage oppor­tu­ni­ty from this inher­ent volatil­i­ty in the cryp­to ecosys­tem. The fund made a lot of money.

In April 2019, Mr. Bankman-Fried moved to Nas­sau, Bahamas, and launched his cryp­to exchange FTX to pro­vide the infra­struc­ture for cryp­to investors to buy and sell dig­i­tal assets such as bit­coin, ether, solano, and a dozen oth­er tokens via its plat­form. He set up two dif­fer­ent exchanges: one in com­pli­ance with U.S. laws and the oth­er for inter­na­tion­al investors. 

FTX Inter­na­tion­al offered investors an option to trade in tok­enized stocks, which are dig­i­tal coin-based deriv­a­tive of shares of actu­al com­pa­nies. It also allowed users to bet on expect­ed val­u­a­tions of pre-IPO com­pa­nies. Such fea­tures attract­ed users to the platforms. 

Investors poured mon­ey into the com­pa­ny. Sequoia, Ontario Teach­ers’ Pen­sion Plan, Soft­Bank, Third Point LLC and Tiger Glob­al invest­ed as FTX rose. Foot­ball star Tom Brady endorsed the plat­form. While FTX does not dis­close its finan­cials, the exchange’s rise made Mr. Bankman-Fried one of the youngest bil­lion­aires. Forbes esti­mat­ed his net worth at $8.7 bil­lion. In Jan­u­ary, the Nas­sau, Bahamas-based cryp­to exchange raised $400 mil­lion in a new round of fund­ing, rais­ing its val­ue to $32 bil­lion, up from $25 bil­lion in Octo­ber 2021. 

Dur­ing the mid-May cryp­to melt­down when Ter­ra Luna and sev­er­al oth­er cryp­to plat­forms failed, Mr. Bankman-Fried was seen as the bailout man. In July, his exchange offered to res­cue cryp­to lender Voy­ager after hedge fund Three Arrow Cap­i­tal (TCA) default­ed on near­ly $1 bil­lion loan.

Some cryp­to watch­ers raised con­cerns about the poten­tial con­flict of inter­est in Mr. Bankman-Fried’s empire. They saw FTX being used to siphon off mon­ey into trad­ing arm Alame­da Research. On Novem­ber 2, a report by Coin­Desk, cit­ing pri­vate doc­u­ments, revealed that Alameda’s bal­ance sheet was loaded with FTT, a token invent­ed by its sis­ter firm FTX. This proved the unusu­al link between the exchange and the trad­ing arm.

A swift collapse 

Fol­low­ing that report, Binance, the largest cryp­to exchange by vol­ume and an ear­ly investor in FTX, said it was liq­ui­dat­ing its $580 mil­lion of FTT hold­ing. Binance CEO Chang­peng Zhao’s deci­sion caused a stir in the cryp­to indus­try as more FTX depos­i­tors rushed to with­draw their invest­ments from the exchange.

FTX’s cus­tomer with­draw­al request hit near­ly $5 bil­lion. That made Mr. Bankman-Fried seek fund­ing assis­tance. Mr. Zhao first agreed to help, and for a day, it looked like FTX struck a deal with its rival. But Binance walked away the next day, say­ing the Bahamas-based exchange’s prob­lems were beyond its con­trol or “abil­i­ty to help.” 

Mean­while, Mr. Bankman-Fried’s per­son­al for­tune tum­bled. On Thurs­day, he tweet­ed: “And so we are where we are. Which sucks, and that’s on me. I’m sor­ry.” A day lat­er, the belea­guered cryp­to exchange filed for bank­rupt­cy pro­tec­tion and said that CEO Bankman-Fried has resigned from his posi­tion, mark­ing a swift end to a three-year old cryp­to empire. 

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