It’s a collapse that some have called crypto’s “Lehman moment.”
The bankruptcy of crypto giant FTX and the resignation of its founder, Sam Bankman-Fried, has left customers in limbo and investors writing off what was once seen as the next big thing in tech.
And this happened within a few days. But in the complex world of crypto, such a collapse can be difficult to analyze. Here are the basics of what happened:
What is FTX?
FTX is a digital currency exchange, a platform where people can buy and sell digital assets like bitcoin, dogecoin and ether. Such platforms grew in popularity in recent years as more people sought to invest in cryptocurrencies without the hassle of dealing with the technical side of such transactions, such as creating a crypto wallet.
How did it get so big?
The company, founded in 2019, quickly rose to international prominence through a series of high-profile acquisitions, aggressive marketing strategies and low trading fees. Competing platforms include Kraken, Coinbase and Gemini.
Even those who did not know the technology were lured to FTX with promises that they could park their money in the account and earn much higher yields than in traditional banks.
Major venture capital groups also bought in, investing almost $2 billion in the company.
Sam Bankman-Fried, the 30-year-old founder of FTX, became the face of the company and, for some, cryptos in general. Celebrity endorsements and major sports sponsorships made FTX hard to miss.
The first red flags
Not long after Bankman-Fried started FTX, crypto began to flourish. The price of bitcoin, which had been trading at around $10,000, rose in 2021, peaking at more than $64,000. Venture capital money poured into all things blockchain and crypto, and crypto platforms moved to attract customers beyond the technologists and blockchain evangelists who once fueled its rise.
The price of bitcoin, generally seen as an indicator of the broader crypto market, fell dramatically from the highs of late 2021. It is now trading at around $16,000. Other crypto and token values followed suit.
The broader crypto industry downturn had already forced many major platforms to shut down, but FTX seemed immune, even buying out some of its struggling competitors.
But things began to change earlier this month, when the balance sheet of a crypto investment firm that was also owned by Bankman-Fried, Alameda Research, was published by CoinDesk, a digital media website focused on crypto.
It showed that Alameda held a large amount of a digital currency created by FTX called FTT. And although FTT had a certain market value, if the price fell, Alameda would be at risk of bankruptcy.
What is FTT?
FTT is a digital token created by FTX that is similar to cryptocurrencies such as bitcoin. Many crypto platforms now create their own tokens as a way to encourage people to use their services by offering benefits associated with their tokens. As such, tokens can act as shares on the platform.
These digital tokens use blockchain technology, in which computers contribute to a shared ledger that can be used to track digital assets. The first blockchain project, bitcoin, relies on many computers competing against each other to create a distributed system that no one computer can control.
But not all blockchains, cryptocurrencies or tokens work the same way, and many are no longer distributed like bitcoin. Tokens on a blockchain can be created by a single entity, as was the case with FTT, which was created by FTX and given as a reward to users. FTT was also less transparent than other tokens, making it difficult to track how many tokens had been generated. People could buy and sell FTT, but trading was relatively limited. Other platforms also held the mark.
A virtual bank
After Alameda’s balance was revealed, Changpeng “CZ” Zhao, CEO of crypto platform Binance, a rival of FTX, announced on November 6 that his company would sell all of its FTT tokens. The price of FTT dropped significantly.
As the price fell, many FTX clients moved to withdraw their assets from the platform. Although the extent of the connections between Alameda and FTX was not yet public, a series of recent crypto platform collapses had already put the crypto community on edge.
These withdrawals would end up like a classic bank, in which people worried about a bank’s solvency rush to withdraw their money before they run out of cash. Billions of dollars were poured from the platform.
On November 8, FTX stopped allowing customers to withdraw money from the platform.
An unbalanced balance sheet
What was not yet public was the extent of the connections between Alameda and FTX, or how bad things were for the Bankman-Fried companies.
Those connections began to become clearer in the days following FTX’s move to halt withdrawals, as did its financial challenges. Media organizations including Bloomberg, the Financial Times, the Wall Street Journal and others cited anonymous sources as saying that FTX needed $8 billion to cover the gap between what it owed and what it could pay. NBC News has not verified those reports, and Bankman-Fried said in an interview Monday with a Vox reporter on Twitter DM that she needed to raise $8 billion in the next two weeks to make things right with the account holders.
The Wall Street Journal and CNBC, also citing anonymous sources, reported that Alameda had used FTX funds for trading.
And in the Vox interview, Bankman-Fried appeared to confirm reports that funds had moved between FTX and Alameda, adding that he “thought Alameda had sufficient collateral” to cover the moves.
Soon after, blockchain analysts tracked the flow of $400 million in assets from FTX accounts, though it was unclear why those funds had been moved.
In a series of text messages to Reuters, Bankman-Fried denied that the funds were secretly sent from one company to another. He blamed the transfers on a bad internal tagging issue.
However, it is difficult to determine how and why the company’s funds were handled as they were, according to a court filing by current FTX CEO John Ray, who helped navigate Enron through the corporate bankruptcy process earlier in the year. 2000.
This is because FTX and its sister companies allegedly did not follow standard financial reporting procedures.
Normally, a business produces balance sheets several times a year that provide reliable information on the company’s assets (what the business owns) and its liabilities (what it owes), among other things. But the balance sheets of the Bankman-Fried firms were never audited, according to the company’s bankruptcy court filings, meaning there is no reliable accounting or paper trail of what money the company had and where it went.
Ray called FTX’s poor management and financial uncertainty “unprecedented.”
“Never in my career have I seen such a complete failure of corporate controls and such a complete lack of reliable financial information as has occurred here.”
Ray wrote that the company has so far secured $740 million in cryptocurrency held by various companies that make up FTX and Alameda, a number that is only a “fraction” of what they hope to recover.
A lifeline went away
Before the full extent of the crisis became public, and Desperate to keep his companies afloat, Bankman-Fried grabbed for a lifeline as signs of a wider crypto crash emerged.
Zhao, one of FTX’s first investors, stepped in to make a play for his former rival. On November 8, it announced that Binance would buy FTX for an undisclosed sum in what would essentially amount to a bailout for the beleaguered firm. But Binance quickly backed down, with Zhao citing reports that FTX had mismanaged user funds and information collected during the standard due diligence process that accompanies such arrangements.
Bankman-Fried has acknowledged the company’s problems on Twitter, where he remains active. Last week he posted a long thread which began “1) I’m sorry. That’s the biggest thing.”
“I f—– up, and I should have done better,” he added.
Last Friday, November 11, Bankman-Fried resigned as CEO of FTX and the companies he oversaw filed for Chapter 11 bankruptcy. The Wall Street Journal and Associated Press, citing anonymous sources, have reported that FTX now faces investigations by Securities and Exchange Commission and Department of Justice. NBC News has not verified these reports.
