Cryptocurrency Exchange FTX Collapses, Leaving Customers in its Wake

11/16/22

Earlier this year in May, the cryptocurrency market experienced a $2 trillion crash. After seeing the effects of this crash, the world’s third largest cryptocurrency exchange, FTX, offered financial lifelines to several collapsing firms. When last week FTX was in need of a similar bailout, rival exchange Binance seemed to be on the path to delivering FTX the help they so desperately needed. On Tuesday, Binance announced it had reached a deal to bail out FTX by buying the company. However, Binance CEO Changpeng Zhao added in the announcement that Binance had the discretion to pull out of the deal at any time.

This is where things started to take a turn for the worst for FTX. It began with a report about Alameda Research, a hedge fund run by FTX CEO Sam Bankman-Fried, held an unusually large amount of FTX native cryptocurrency token called FTT. FTX and Alameda are meant to be separate businesses, but the leaked report claimed that the liquid market cap of FTT tokens was about $3.35 billion while Alameda held about $5.5 billion worth of FTT in collateral and debt leverages.  

On Wednesday, Binance announced it would not be going through with the purchase of FTX “as a result of corporate due diligence,” also citing regulatory investigations and reports of mishandling of funds. This announcement in conjunction with the leaked report on Alameda Research resulted in a mass selloff of FTT tokens dropping its price below $20. Since Tuesday, FTT’s price had fallen about 80 percent. Because of this drop in value and FTX’s lack of sufficient funds to pay the sellers, it imposed a halt on withdrawals altogether. On Friday, FTX began Chapter 11 bankruptcy proceedings.

If you thought that is where the story of FTX’s demise ended, you would be wrong. Mere hours after former FTX CEO Sam Bankman-Fried stepped down from the company, a suspected hack drained hundreds of millions of dollars’ worth of crypto assets from customer’s accounts. FTX’s collapse threatened to take down other digital asset startups tied to the exchanged and its former CEO. BlockFi, a crypto lending business FTX rescued in its bailout in May announced it was suspending withdrawals late Thursday night. Similarly, CFO of cryptocurrency exchange Coinbase, Alesia Haas is quoted as saying “We feel burned by this, too. We would have never expected this.”

All of this news quickly reverberated around DC as calls to regulate the crypto industry grow from both sides of the aisle. Chairman Brown on Wednesday stated “The recent collapse of FTX is a loud warning bell that cryptocurrencies can fail…(he) will continue to work with our watchdogs to hold bad actors in crypto markets accountable. He's committed to finding the best path forward to protect consumers and the stability of the U.S. markets and banking system.” He is joined by Chairwoman Maxine Waters and Ranking Member Patrick McHenry in calling on more scrutiny of crypto. The OBL expects a broad debate on these issues as Congress returns this week.