On November 11, 2022, FTX, a Bahamas-based cryptocurrency exchange valued at $32 billion on January 31st following an investment round, filed a petition for bankruptcy and reorganization under Chapter 11 of the U.S. Bankruptcy Code, along with its U.S. branch and affiliated trading company Alameda Research. The Bahamas Securities Commission opposed the petition. On November 13, 2022, the Bahamas Securities Commission initiated its own proceedings in response to market information. On November 15, a liquidator was appointed to manage FTX's Bahamian branch during the bankruptcy process, following the resignation of Sam Bankman-Fried, the exchange's founder and CEO. The question that is plaguing the entire market is how exactly did it happen that the company, which signed a sponsorship agreement with the Mercedes-Benz Formula One team back in September 2021, went from being one of the market leaders to collapse in the space of a few days, with its founder losing 94% of his fortune, once valued at $16 billion?
While final answers will have to wait for the conclusion of bankruptcy proceedings in the United States and the Bahamas, as well as the review initiated on November 14th by New York prosecutors, we can already see movements that significantly influenced the course of events, confirmed by various sources. One harbinger of impending troubles was the connection between the FTX exchange and Alameda Research. According to Reuters sources connected to the company, FTX founder Sam Bankman-Fried secretly transferred up to $10 billion in exchange client funds to Alameda Research. According to the reports, over the past two years, Alameda began borrowing money from a number of different investors, intended to be used for investment purposes, primarily in cryptocurrency-related companies, including some that could be considered "higher risk." Due to the poor situation in the cryptocurrency market, fueled by global events, as well as the failure of the stablecoin terraUSD, and the subsequent collapse of Three Arrows Capital, a respected hedge fund, Alameda began offering hundreds of millions of dollars in financing or outright acquiring dying projects at fire sales, using funds obtained through loans. Following the falling prices of leading cryptocurrencies and the outflow of capital from the market, some of Alameda's lenders began seeking repayment of funds that were currently unavailable to the company, as the money was tied up in failed investments or projects that were impossible to monetize under the current circumstances. Alameda repaid its obligations largely by relying on capital raised from customer deposits on the FTX exchange, removing the aforementioned funds from its books to resolve the company's debt problem without media attention. Both Reuters and the Journal report that nearly $10 billion disappeared from the exchange, of which, according to Reuters, an unspecified sum between $1 and $2 billion was siphoned off without a trace. Attempts were made to cover the shortfall in capital raised from customers by issuing the FTT token, created by FTX, and Serum, issued and promoted by FTX and Alameda. According to information published by CoinDesk on November 2, 2022, Alameda Research was largely dependent on the FTX exchange's native token, the aforementioned FTT. This led to a disastrous paradox, where the company's assets were largely dependent on the value of the token it issued. It is worth emphasizing that at the time, the amount of the FTT token in circulation was negligible; only a small amount was released into free circulation, which kept the price relatively high. The company's capital, based on massive amounts of the same token, was in fact fictitious in a situation requiring its liquidation. Nevertheless, the careless management of FTX and Alameda's assets likely wouldn't have caused the current crash if not for the ongoing battle for market position. FTX was founded in 2019. Six months after the exchange's launch, Changpend "CZ" Zhao, the founder of Binance, the world's largest cryptocurrency exchange currently controlling 50% of all exchanges, invested $100 million in exchange for a 20% stake in FTX. Over the next 18 months, FTX's value soared beyond expectations, and many market participants were ready to anoint Sam Bankman-Fried's platform as the future Binance conqueror. When FTX applied for a license in Gibraltar in May 2021, it became necessary to provide information about the company's main shareholders, including Binance. Due to FTX's growing market position, the competing co-owner was reluctant to cooperate. In July 2021, having still not received the information requested by the Gibraltar regulator from Binance, Sam Bankman-Fried bought Binance's position in FTX for an estimated $2 billion. The sum owed for the FTX shares was paid in part in the FTT token. Returning to current events, most likely as a consequence of reports presented by CoinDesk, Binance founder Changpend Zhao informed the market on November 6 via Twitter that his exchange, which at the time held $580 million in FTT tokens, would begin the process of slowly selling off assets once obtained for shares in the competing exchange. The poor market situation and the words of the owner of the world's largest cryptocurrency exchange platform, which also held large amounts of the FTT token, were enough to drastically change the attitude of the Web3 community. On November 2, 2022, at 12:00 PM, At 6:00 AM, according to CoinMarketCap, the FTT was valued at PLN 124.21, with trading volume in the last 24 hours of approximately PLN 300 million. On November 9, 2022, it was PLN 20.60 and over PLN 14 billion in trading volume in the last 24 hours. Simultaneously, exchange users rushed to collect deposited funds, forcing the exchange to withdraw $6 billion in just 72 hours. This, combined with the highly risky asset structure described above, caused massive solvency problems, provoking a domino effect where the effects of all the actions described above began to pile up, resonating with increasingly severe consequences. In an attempt to salvage the situation, Sam Bankman-Fried approached Binance, which resulted in a signed, according to information published by Changpenda Zhao on November 8, 2022, on Twitter, non-binding letter of intent to acquire FTX.com and further ensure the exchange's liquidity for users. On November 9, 2022, the official Binance Twitter account announced that, following due diligence, the exchange had decided to withdraw from purchasing FTX. On the same day, Binance's founder tweeted "Sad day. Tried," accompanied by a crying emoji, sealing FTX's imminent demise. On November 11, the exchange filed for bankruptcy.
For the average user, the above events should lead to two main conclusions: it's not worth keeping your cryptocurrency assets in custody, even with the largest market players, and you should avoid investing in tokens whose small amounts have been admitted to the market, while significantly larger holdings are held by their issuers. Although the situation in the cryptocurrency market has been improving significantly in recent years, and in many cases, good practices for participation have been developed almost organically, it is still largely unregulated, with significantly fewer restrictions than the traditional capital market. Therefore, you should act in accordance with common sense, supported by as in-depth analysis of a given project or exchange as possible. To appreciate the difference in the level of verification of a given entity's standing, it suffices to note that Tether, often referred to as USDT, is a stablecoin intended to always be equivalent to $1.00, of which over $65 billion circulates in the market, according to Tether Limited Inc. Fully backed by dollars, it has never been audited by an external entity since the beginning of 2014. On September 19, 2022, in connection with proceedings pending before the New York District Court, Bitfinex and Tether were required to submit documents confirming the appropriate dollar backing of USDT. Although the outcome of this verification is not yet known, please note that at the same time, even the least significant entity for the global economy, listed on the Stock Exchange or NewConnect, was legally required to publish annual financial statements subject to audit by a certified auditor.
This alert is for informational purposes only and does not constitute legal advice.
author:
