November 2022 witnessed the collapse of FTX, the world’s leading crypto exchange, and the downfall of the ‘king of crypto’ – Sam Bankman-Fried, the founder of FTX.
“I’m really sorry, again, that we ended up here. Hopefully things can find a way to recover,” Bankman-Fried wrote on Twitter about the collapse of the FTX empire after stepping down and FTX filed for bankruptcy in the United States. “I was shocked to see things unravel the way they did.”
What is FTX?
FTX was one of the world’s largest cryptocurrency exchanges until November this year. The Bahamas-based firm was founded in 2019 by Bankman-Fried. The exchange enabled customers to trade digital currencies for other digital currencies like bitcoin or traditional money. It’s like the New York Stock Exchange but for cryptocurrency. FTX also had its own cryptocurrency called FTX Token (FTT).
What happened to FTX?
Those watching the crypto industry are wondering how a $32 billion company collapsed overnight.
On November 2, crypto trade publication Coindesk cited a leaked financial document that raised questions about the relationship between FTX and Bankman-Fried’s trading house, Alameda. On paper, these were two separate companies owned by the same man. But the article pointed out that Alameda “rests on a foundation largely made up of a coin that a sister company invented.” This suggested that Alameda and FTX were heavily dependent on each other, exposing the volatility in FTT and the flawed organizational structure system.
On November 6, the world’s largest cryptocurrency firm Binance announced that it would sell its FTT tokens “due to recent revelations” which plummeted FTT’s price which spooked traders to pull out of FTX. In the next 72 hours, there had been roughly $6 billion of net withdrawals from FTX after which the company enter a liquidity crunch, meaning it lacked the money to fulfil requests.
FTT had lost most of its value by the time its rival Binance backed out of its plans to buy FTX saying the decision was “as a result of corporate due diligence.” It also cited reports of mishandled funds. “Every time a major player in an industry fails, retail consumers will suffer,” Binance said in a statement.
The digital asset empire filed for bankrupcy on November 11.
The cryptocurrency market has lost more than $1.4 trillion in value this year triggered by the fall of FTX.
What does the dramatic collapse mean for crypto industry?
- Experts say that crypto will survive the FTX collapse but it will take time to restore confidence. Some industry leaders have claimed that the FTX collapse set the industry back by five years. Bitcoin declined from US$20,000 to US$16,600 after the FTX fall.
- As the fallout continues, the biggest losers are FTX’s customers who will face a lengthy process to recover their assets. To survive and thrive, crypto companies would need to ensure that consumers are protected from fraud and abuse.
- Experts say that the FTX crash does not spell the end for the crypto industry. They say it was not the crypto business but unethical business practices such as mismanagement and likely fraud that led to the downfall. The FTX did not keep appropriate books and records and failed to implement good controls and ethics. FTX was run as the “personal fiefdom” of founder Sam Bankman-Fried. It was described as “one of the most abrupt and difficult collapses in the history of corporate America.”
- Digital assets are largely unregulated. The FTX episode spotlighted the need for better regulation to protect investors and reduce crime in the cryptocurrency market. Experts say there is an immediate need for stricter regulation to prevent all fraudulent activities and benefit the cryptocurrency eventually.
- FTX’s rapid fall has exposed some structural weaknesses of crypto exchanges, prompting renewed calls for a strong self-regulation system within the entire industry.
