With the bankruptcy of FTX – one of the most important trading platforms – the cryptocurrency sector is experiencing a major shake-up, as one of the main pillars on which the world of online currencies rested is crumbling.
An event that risks triggering a tragic domino effect on the entire sector.
Many compared the news to the Lehman Brothers affair, which triggered the sub-prime financial crisis in 2008.
The effects are devastating, but here we will attempt to shed some light on what happened.
Sam Bankman-Fried: a cautionary tale of cryptocurrencies
Just a few hours after the news was announced, the value of Bitcoin and Ethereum, the main cryptocurrencies in the market, plummeted by 15% and 24% respectively.
The news of the collapse saw the immediate withdrawal of one of FTX’s main outside investors, Sequoia Capital, which had invested some $213.5 million in the platform.
A holding second only to Venture Capital, whose value was estimated at around $425 million.
As early as 9 November, the value of Sequioia Capital’s shares had dropped to $0. Then, two days later, FTX and FTX US filed for bankruptcy, which in the US was filed under Chapter 11 of the US Bankruptcy Code (“reorganization” bankruptcy), with the aim of allowing the company to continue operating while negotiating with creditors.
The collapse was followed by the resignation of the CEO Sam Bankman-Fried.
Sam Bankman-Fried: the rise of FXT and cryptocurrencies
Sam Bankman-Fried was no stranger to intricacies and controversy in relation to his trading activities.
Obviously, no one could have imagined such a dramatic fall from grace, seeing as Sam Bankman-Fried, with a fortune of around $32 billion, was among the top 100 richest men in the world according to the Forbes list.
An MIT graduate in mathematics and physics, Bankman entered the world of cryptocurrencies almost by chance, although he had long had a passion for trading.
He founded FTX in 2019 and sold a stake in the business to Binance for $70 million.
FTX bankruptcy: controversies and successes of the cryptocurrency platform
The history of the platform is, however, marked by great controversy.
FTX had repeatedly come to the attention of the Securities and Exchange Commission (SEC), which has always called for strict and stringent regulation of the financial markets by the US government.
The FTX platform was trading in financial derivatives, even though such activities were not permitted by the US government.
To get around this problem, Bankman chose Hong Kong and the Bahamas as the location of the company’s registered offices.
Thanks to his ties with and generous donations to the Democratic Party, he was able to work undisturbed, avoiding – at least until the Biden administration – the imposition of regulatory measures with respect to cryptocurrencies.
FXT bankruptcy: The Binance tweet that triggered the cryptocurrency crash
The trigger was a tweet by Binance CEO Changpeng Zhao, questioning the liquidity of FTX, in which Binance had a significant stake: $500 million.
Due to the recent revelations that have come to light, we have decided to liquidate any remaining FTT
on our books
Indeed, as early as 2 November, an online magazine raised questions about FTX’s solvency, in the event of an FTT collapse.
The CEO justified the decision in another Tweet, where he recalled the failure of the LUNA token of the Terra ecosystem:
Liquidating our FTTs is just post-exit risk management, learning from Luna.
The about-face of Binance
Binance’s CEO was not fully aware of the earthquake it would generate: a stringent mechanism to withdraw deposits by many customers.
Proof of this is the fact that, soon afterwards, Zhao offered to take over the company, rescuing it from a situation that was now out of control.
This decision, however, suffered a further setback, owing to a decisive tweet:
The problems are beyond our control and our ability to help.
FTX collapse: controversy in the cryptocurrency world
Suspicions regarding the reasons for the bankruptcy were aroused not only by the words of former US Treasury Secretary Larry Summers, who compared the affair to the Enron scandal, but also by some unlikely stories about the platform possibly being hacked.
FTX has been hacked; the funds seem to have disappeared. FTX apps are malware,
delete them. Don’t go to the FTX site: it could be a trojan
These are the words stated by a director of the company on their Telegram channel.
In fact, an analysis by Elliptic, an organisation that tracks cryptocurrency trades, analysed a total of $663 million diverted to other shores.
Of this amount, 477 million was allegedly stolen, with the remainder secured in FTX’s deposits.
The loot comprises various cryptocurrencies – Entherum, Avalanche, Binance Smart and Solana – that were then converted into stable online currencies with decentralised exchanges.
A technique commonly used by hackers, which would make the story appear plausible.
Less unconvincing, however, is the timing: coming just 24 hours after filing for bankruptcy suggests an attempt by the top management to salvage what remains before liquidation.
Class Action Lawsuits
The victims of FTX are preparing to take legal action and, joined together in a rapidly expanding group of more than 50 members called the FTX CLASS ACTION LAWSUIT (CHAT), fearing that the official telegram might be shut down, they are organising themselves outside the exchanges’ outlets.
AJ, the creator of the group, said that a lawyer was still being appointed, but that this “should be finalised in a couple of days“.
In order to collect information from creditors, the Group created a Google form called Users Affected by the FTX Bankruptcy.