With the collapse of FTX – the most prominent trading platform – the cryptocurrency sector suffers a major shock, causing one of the main pillars on which the world of online currencies relied to fall. This event risks triggering a tragic domino effect across the entire industry. By many, the news has been compared to the Lehman Brothers affair, which sparked the subprime mortgage financial crisis in 2008. The effects are devastating, but let's try to understand more about it.
Sam Bankman-Fried: the downward spiral of cryptocurrencies
Just a few hours from the communication of the news were enough for Bitcoin and Ethereum, the leading cryptocurrencies in the market, to lose 15% and 24% of their value. The news of the collapse saw the immediate withdrawal of one of FTX's main external investors, Sequoia Capital, which had invested an asset of approximately 213.5 million dollars in the platform. A stake second only to Venture Capital, whose value was estimated at 425 million. Already on November 9, Sequoia Capital's shares were marked at 0 dollars; then, two days later, FTX and FTX US filed for bankruptcy, resorting, in the United States, to Chapter 11: a structured bankruptcy aimed at allowing the company to continue operating even during negotiations with creditors. Following the collapse, the resignation of Chief Executive Officer Sam Bankman-Fried followed.
Sam Bankman-Fried: the rise of FTX and cryptocurrencies
Sam Bankman-Fried was no stranger to intricate and controversial situations regarding his trading activities. Of course, no one would have imagined such a dramatic decline, given that Sam Bankman-Fried, with a net worth of around 32 billion dollars, appeared in the top 100 of the world's richest men released by Forbes. A MIT graduate in mathematics and physics, Bankman entered the world of cryptocurrencies almost by accident, although he had long held a passion for trading. In 2019, he founded FTX, selling a stake to Binance for 70 million dollars.
FTX Collapse: controversies and successes of the cryptocurrency platform
The history of the platform is, however, marked by major controversies. FTX had repeatedly alerted the SEC, the oversight and supervision agency of the American stock exchange, which has always called on the US government for rigid and severe regulation of financial markets. The FTX platform engaged in financial derivatives trading, even though such activities were not permitted by the United States government. To bypass this problem, Bankman chose Hong Kong and the Bahamas as headquarters. Thanks to connections and generous funding toward the Democratic Party, he was able to work undisturbed, avoiding – at least until the Biden administration – regulatory measures regarding cryptocurrencies.
FTX Collapse: The Binance tweet ignited the fuse against cryptocurrencies
Igniting the fuse was a tweet by Binance CEO Changpeng Zhao, in which the liquidity of FTX, with which Binance shared a heavily weighted stake of 500 million dollars, was called into question.
"Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books"
In fact, already on November 2, an online magazine raised questions about the solvency of FTX, in the event that a collapse of FTT were to occur. The CEO justified the decision in another Tweet, where he recalled the failure of Luna, the token of the Terra ecosystem:
"Liquidating our FTT is just post-exit risk management, learning from LUNA"
The U-turn by Binance
The CEO of Binance was not entirely aware of the earthquake he would generate: a stringent mechanism of deposit withdrawals by many clients. Proof of this is the fact that, immediately afterward, Zhao offered to take over the company, saving it from a situation by then out of control. The decision, however, suffered a further U-turn, declared by a decisive tweet:
"The issues are beyond our control or ability to help"
FTX Collapse: controversies in cryptocurrency trading
Arousing suspicions about the reasons for the collapse would be not only the words of former US Treasury Secretary Larry Summers, who compares the affair to the Enron scandal, but also some far-fetched stories regarding a possible hacking of the platform.
"FTX has been hacked; funds appear to be gone. FTX apps are malware, delete them. Do not go to the FTX site: it could be a trojan"
These were the words reported by an administrator of the company on his Telegram channel. In fact, an analysis by Elliptic, an entity that tracks cryptocurrency traffic, analyzed a total of 663 million dollars diverted to other destinations. Of this figure, 477 million were reportedly stolen, while the rest were secured in FTX deposits. The loot includes various cryptocurrencies – Ethereum, Avalanche, Binance Smart, and Solana – later converted into stable online currencies through decentralized exchanges. A very widespread technique among hackers, which would make the story appear plausible. What fails to convince, however, is the timing within 24 hours following the bankruptcy filing: it hints at an attempt by top management to salvage what remains before liquidation.
Class Action on the horizon
The victims of FTX – news from two days ago – are preparing legal action and, unified in a rapidly expanding group of over 50 members called FTX CLASS ACTION LAWSUIT (CHAT), fearing that the official Telegram channel might face closure, are organizing outside of exchange outlets. AJ, the creator of the group, said a lawyer was still in the process of being appointed, but "they should finish in a couple of days." In order to gather information from creditors, the Group has created a Google Form titled Users affected by the bankruptcy of FTX.