Collapse of FTX: Why it led to bankruptcy
A recent downfall in the crypto world has sent a huge shock throughout the industry as the cryptocurrency exchange FTX filed for bankruptcy, and the resignation of its chief executive, Sam Bankman- Fried.
Sam Bankman-Fried is known to be the founder of two separate companies, Alameda Research and Crypto exchange called Futures Exchange or FTX. But, were they really separate? It has been reported hat FTX printed a lot of their currency, FTT which was then sent to Alameda to make it seem like a healthy fund. When the customers of FTX found out, their was a huge panic, causing them to withdraw their money. What followed was an even bigger surprise. Sam Bankman- Fried created a secret backdoor in FTX’s bookkeeping system. This let him move the depositors’ money off of FTX to Alameda without the customers or even his own employees being alerted. It seems that he may has secretly shifted up to $10 billion of their funds to Alameda.
FTX seemed to be set for a bailout from Binance when suddenly the deal fell apart. After Binance changed its course on the deal to save its company, FTX faced days of whiplash, being forced to file for bankruptcy. The new FTX chief, Mr. Ray is known to have helped manage the aftermath of some of the largest corporate collapses in history, which also include the implosion of Enron in 2001.
Mr. Ray mentioned that he has never seen “such a complete failure of corporate control.” He described many corporate missteps which included the use of software to “conceal the misuse of customer funds.” When filing for bankruptcy, Mr. Ray mentioned that he did not trust the accuracy of the financial statements that were assembled when Mr. Bankman- Fried was in leadership.
Due to the sudden downfall of the company, hundreds of thousands of customers who had deposited their holdings on the FTX, now have their savings in jeopardy. Even though Mr. Ray and his team were able to secure around $740 million of cryptocurrency from parts of FTX’s business, he mentioned, this was “only a fraction” of what he was actually hoping to recover.
It has always been a struggle for the crypto industry to convince regulators, investors, as well as ordinary customers that it is trustworthy. Now with the collapse of the company, an investigation has been started by the Justice Department and the Securities and Exchange Commission to determine if FTX was using customer funds to prop up Research for Alameda, another company founded by Mr. Bankman- Fried.
FTX is known to have financially helped many collapsing firms when the crypto market experienced a $2 trillion crash in May. The fall of FTX has had a rippling effect throughout the industry. Some lenders such as BlockFi and Genesis have announced a pause in their operation due to the situation. Even FTX’s own cryptocurrency, FTT, has faced over 90 percent drop, alongside Bitcoin going down 19 percent and Ether dropping 24 percent.