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House Financial Services Committee Examines Digital Assets

Alex Wong

Sam Bankman-Fried’s FTX, the once-mighty cryptocurrency exchange that extended lifelines to distressed crypto-related firms, was unable to prevent its own Chapter 11 bankruptcy filing.

Here’s what happened, from beginning to end-ish:

Monday

The rapid meltdown of Bankman-Fried’s crypto empire came about after crypto exchange rival Binance, an early investor in FTX, said it would offload the rest of its holdings in FTX token (FTT-USD), the coin issued by FTX. That was “due to recent revelations” likely referring to a CoinDesk story from the prior week that raised questions about the overlap between FTX and SBF’s trading firm, Alameda Research.

Alameda’s balance sheet reportedly owned $5.8B of FTX token (FTT-USD) as of June 30, accounting for a huge portion of its $14.6B in total assets, thus highlighting the close ties between FTX and Alameda despite the fact that they’re two separate entities. The troubling part was how much of FTT that Alameda owned compared with roughly 200M FTT coins in circulation worth $4.56B at the time.

The price of FTX token (FTT-USD) slid some 30% to $16.47 on November 7 as market participants weighed Alameda’s financial health as well as a simultaneous slump in FTX token (FTT-USD).

In the initial uncovering of Alameda’s finances, SBF shrugged off growing speculation about the solvency of FTX, saying its “assets are fine” and it “has enough to cover all client holdings.”

Tuesday

FTX was said to have seen around $6B of customer withdrawals over the past three days, well above the typical average daily flows in the tens of millions of dollars range, as the exchange came under liquidity pressure as investors became more worried about its insolvency risk.

Looking at on-chain data at the time, the exchange appeared to have suspended processing withdrawal requests from its clients (which later proved to be a more than 48-hour pause), as FTX struggled to fill the overwhelming amount of withdrawal requests in the wake of its liquidity crunch.

In turn, FTT token (FTT-USD) dropped to just $3.59, and the liquidity crunch became that more serious.

Binance appeared to come to the rescue by signing a non-binding deal to buy the non-U.S. portion of FTX, with both SBF and Binance chief Changpeng Zhao confirming the agreement via Twitter. Of course, the acquisition was not guaranteed.

Wednesday

Binance walked away from its initial offer to buy FTX.com due to reports about fund mishandling and regulatory issues at the exchange. The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission probed FTX on whether it appropriately handled client funds, as well as its financial relationship with FTX US, the American division of FTX, and FTX’s sister company Alameda.

“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” Binance wrote in a Twitter post.

While Binance’s move to back out of its letter of intent to buy FTX.com was widely expected, cryptos like bitcoin (BTC-USD) and ethereum (ETH-USD) collapsed by double-digit percentages, underscoring the negative implications of FTX’s collapse for the cryptoverse. Binance’s retreat forced FTX to scramble for rescue financing. In fact, SBF reportedly told investors that his exchange would need to file for bankruptcy unless it could garner more capital to cover its $8B shortfall.

The crypto “industry is due for some soul-searching,” said Mikkel Morch, chairman at crypto hedge fund ARK36. But there’s some positive developments underway following FTX’s downfall, including Binance “pushing for major exchanges to adopt proof of reserves as an industry standard. Some have already started publishing it. Newcomers to the space are discovering the importance of self-custody of their assets,” he added.

Thursday: The final nail in the coffin

The Wall Street Journal reported that FTX.com loaned out more than half of its customer funds to back risky wagers by Alameda, prompting the exchange’s downfall. Specifically, FTX was said to have $16B in customer assets but lent $10B of those funds to Alameda.

SBF took to Twitter and apologized for his mistakes, pledging to use “every penny” the liquidity-strapped exchange has to repay its users. He wrote that Alameda was “winding down trading” and “one way or another, soon they won’t be trading on FTX anymore.”

He said that he should’ve been more transparent with communication, and he also misjudged users’ margin given “a poor internal labeling of bank-related accounts,” which was once of the main reasons why Binance backed away from its proposed FTX deal.

The 30-year-old claimed that FTX.com still has a chance to survive despite its ongoing liquidity crunch, noting “there are a number of players who we are in talks with, LOIs, term sheets, etc.”

Friday

In the face of its multibillion-dollar shortfall and its inability to meet a colossal amount of customer withdrawals, SBF stepped down from his CEO role as FTX Group, comprised of FTX.com, FTX.US, Alameda Research and ~130 affiliated entities, have all filed for Chapter 11 bankruptcy proceedings in the U.S. That doesn’t necessarily mean that FTX is going fully under, but instead the exchange, founded in 2019, can continue operating as it determines how to pay its creditors.

While SBF made claims all week that FTX.US was not impacted by FTX.com’s crisis, the former reportedly stopped processing withdrawals at about midday New York time on Friday.

What’s at stake for the crypto space?

The knock-on effects for the broader crypto ecosystem has only started to take hold. Troubled crypto lender BlockFi, for instance, paused client withdrawals due to the “lack of clarity” on the status of SBF’s crumbling empire. And Bloomberg reported that SoftBank Group (OTCPK:SFTBY) (OTCPK:SFTBF) (OTCPK:SOBKY) had invested nearly $100M in FTX.com but expects to write off the full value of its stake.

This week’s events certainly weren’t the first major blow to the crypto space. In May, the Terra ecosystem failed, and crypto lender Celsius and crypto hedge fund Three Arrows Capital filed for bankruptcy protection, resulting in depressed token prices, industry-wide pain and regulatory scrutiny. Some industry experts suggested the FTX drama will only add to those developments.

ARK36 CEO and Executive Director Anto Paroian noted that given FTX’s “diverse ties” to the crypto industry, “it will take weeks before we see the full extent of the damage done.”

Previously, (Nov. 11) Binance CEO warned that FTX-driven crypto market woes echo 2008 GFC.


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