The contagion of Voyager, Celsius, and 3AC left the crypto industry in the doldrums. Well, such incidents of bank runs and liquidity crunch seem to be commonplace in the crypto segment. The recent yet shocking downfall of the FTX exchange, though totally unexpected, is another added to the list.
However, nothing happens as a sudden catastrophe – there are always signals prior to its occurrence. Even the FTX fraud flagged signals. It’s we who ignored these warning signs of FTX.
This article delves into how the Sam Bankman-Fried company FTX had been digging its own grave and through several unscrupulous and fraudulent activities, finally resulted in its own downfall. Yes, the fall of ne of the reputed, respected, and supposed-to-be stable crypto exchanges!
Let’s dive into the various aspects of this shell-shocking story filled with deviousness and trickery that sent shockwaves through the entire crypto industry.
The Beginning of the End of a Crypto Empire!
On November 7, cryptocurrencies, including the pioneer Bitcoin, witnessed a steep decline in their prices as Binance, the largest global crypto exchange by volume, abandoned its earlier plans to acquire Sam Bankman-Fried’s company FTX. The leader in crypto exchanges announced its decision after a due diligence examination, reports on customers’ fund’s mismanagement, and an alleged U.S. agency investigation of FTX.
A series of jaw-dropping revelations came up. When CoinDesk got the financials of Sam’s company, it flagged him to be the CEO of another trading company, Alameda Research. The story doesn’t end there. No, that’s just the beginning! The balance sheet of Alameda Research indicated that a large balance was concentrated around the FTX token, FTT, the native token of the FTX trading platform. It was the fact that Alameda Research is backed by FTX token (FTT) that caused the commotion.
Further investigations threw light on more intriguing facts. Binance CEO ChangPeng Zhao had announced that his company was offloading FTT on its books! That speaks for the inevitable FTX exchange run, accompanied by the liquidity crisis. No doubt, customers wanted to liquidate their crypto holdings from FTX at once. Traders pulled $6 billion in 3 days!
FTX’s partial list of investors includes Tiger Global, Thoma Bravo, Sequoia, SoftBank, and Paradigm – this was another mind-blowing divulgence!
A slew of occurrences followed. Solana dropped by nearly 45% as Alameda Research, the trading company run by Sam Bankman-Fried, was an early supporter of the Solana project. Analysts opine that offshore exchanges would require thorough regulatory scrutiny as most crypto derivative trading happens there!
In the contagion of crypto bankruptcies with Terra, Voyager, Celsius, and 3AC, Sam Bankman-Fried’s (SBF) company FTX was soon to jump on the bandwagon.
What led to FTX’s sudden collapse?
The facts were first put forward by CoinDesk when on November 2, their reporter Ian Allison published the findings that $5.8 billion out of $14.6 billion assets on the balance sheet of Alameda Research were linked to FTX’s native token, FTT.
Both Alameda Research and FTX were founded by Sam Bankman-Fried and there seemed something spurious in these fraternal dealings. During his earlier interviews, Sam clarified that the two are separate entities. However, the close links between Alameda Research and FTX, and the fact that Alameda Research is backed by FTX token (FTT) caused a stir in the crypto community, resulting in a justified bank run. The exchange saw nearly $6 billion in withdrawals within a matter of 72 hours! This in turn led Sam and his team to find an acquisition partner, trying to approach many before Binance entered the scene.
Then comes the interesting element and the culmination of the story. Binance’s CEO, ChangPeng Zhao and Sam Bankman-Fried had been occasional collaborators, however, their interpersonal and business tensions seemed to increase. Binance in a way contributed to the FTX fraud, though it’s not clear if it was intentional.
On November 6, Zhao told Coindesk that Binance would liquidate the remaining balance of FTT tokens distributed as a prior sell-off of FTX equity. In a strange gesture, Alameda Research CEO, Caroline Ellison publicly offered Zhao an over-the-counter deal to purchase tokens at $22 each. This act portrayed Alameda’s state of anxiety about its market impact on Binance’s sale and as Ellison’s offer was below FTX exchange’s public price at that time, it can’t be of much help to Alameda.
Later, Zhao muddied up the claim saying “Liquidating our FTT is just post-risk management, learning from LUNA,” he wrote. We gave support before but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs. Onwards.”
On November 7, came the shocking report from CoinDesk that Zhao is likely to back out of the deal after getting a peek into FTX’s finances, which led to the mass exodus of investors from FTX. Sam tried requesting and convincing the investors and customers, stating that there were no financial issues paying them, though it was a lie.
No one in the crypto industry had ever thought that their “JP Morgan” would embezzle the funds and use them to develop his other trading company (Alameda Research). It was a severe blow to the trust of millions of traders and crypto enthusiasts, shattering the credibility of the system.
Multi-faceted Personality of Sam Bankman-Fried – Lavish, Philanthropic, Humble, and more!
Sam Bankman-Fried led a life of luxury and opulence. Well, don’t undermine its extravagance by imagining a typical tropical paradise! No, absolutely not. Albany, the palatial house was an island in itself; calling it a private community. Located on the Bahamian island of New Providence, this 600-acre property includes anything you name and anything you don’t. Yes, from an 18-hole golf course, mega yacht marina, and public restaurants to children sent to boarding day school across two campuses and the list is endless!
But the question that makes you really ponder is this – Of all places in the world, why would a crypto company owner choose the Bahamas as a dream haven? Doesn’t it trigger intrigue? Well, the Bahamas is known as a pirate republic. The story began in 2020 when the politicians in the Bahamas smelled an opportunity – The world of cryptocurrency. They started by passing laws to attract huge crypto firms like FTX that seemed like a white knight and could take them a long way. Yup, the idea worked.
In July 2021, FTX became a Bahamas entity, moved into the country in September, and Philip “Brave” Davis became the Bahamas Prime Minister the same month. Too much of a coincidence! Soon, FTX became the first exchange to be registered under the Bahamas’ digital asset regulation, known as the DARE act. So, the bottom line was that business and government were hand in glove and both enjoyed the benefits.
In New Providence, Sam Bankman-Fried purchased around 19 properties worth $121 million, post which he painted a philanthropic and altruistic picture of himself. According to the Nassau Guardian, Sam donated $1.4 million worth of KN95 protective masks and Covid testing kits during the pandemic. In addition, he paid for a free public gospel concert as a relief effort during Hurricane Dorian. There were many such initiatives from his end.
Well, the acts of Sam Bankman-Fried appeared to be philanthropic, however, there were ulterior motives. In many ways, FTX was pampering the Bahamian politicians and they were overjoyed with the easy ways in which their hard desires were getting fulfilled. Besides, FTX’s employees also led a luxurious life, ordering groceries twice a week and being spoiled with lavish parties at the Albany.
However, in April, some cracks began showing up. Sam planned with Prime Minister Davis for a $60 million headquarters for FTX which the PM claimed would create many jobs. A few days later, FTX hosted a “Crypto Bahamas” conference at a luxury property Baha Mar, along the sands of Cable Beach. On all these occasions, Sam was “humbly” dressed up in tube socks and a T-shirt.
While the collapse in November seemed a sudden occurrence, it had flagged warning signs from FTX. The $600 million offices based in the Bahamas were a Potemkin village. The construction never started there but for some minor work. Furthermore, the Bahamian FTX employees were laid off and they probably worked in the company for just about six months. The employees were told not to reveal their lay-offs. To sustain its “rosy” picture to the people, FTX purchased the struggling crypto lender BlockFi that held millions of dollars of FTX tokens as collateral for loans. This would mean that those tokens would have crashed at the time if FTX had not gone ahead to offer aid to BlockFi.
On November 11, Sam Bankman-Fried resigned as the CEO of FTX, and both companies Alameda Research and FTX filed for bankruptcy.
What happens to Sam Bankman-Fried now?
Well, as you sow, so shall you reap. That said, Sam Bankman-Fried could be spending years in prison over the FTX fraud of $32 billion if the U.S. ever gets around to arresting him. The government may charge him a fine, which of course would be fiat money, not FTT!
Did you know Sam Bankman-Fried was once one the wealthiest men in the world worth $26 billion? Now, he has just 100k in his bank account. Well, someone who was regarded as the “JP Morgan” of the crypto industry and revered as its savior, trampled upon the infallible faith and trust of the community.
Investors, traders, and crypto enthusiasts feel frustrated and will henceforth get wary of every crypto project. The downfall of the FTX exchange will serve as a turning point in the history of cryptocurrency and will be a lesson for many – traders and owners alike.
