FTX crash: The rise and fall of crypto king

On November 11, the crypto world was up for a shock, as FTX, one of the world’s leading cryptocurrency exchanges, filed for bankruptcy. Sam Bankman-Fried, the chief executive officer and founder of FTX, also resigned from his position. Apart from FTX, Alameda Research, a hedge fund run by Fried and FTX US, which is the US-based subsidiary of FTX have also filed for bankruptcy under Section 11. The development comes as the crypto exchange is undergoing investigation for financial discrepancies with millions of customers’ funds missing from the crypto exchange.

The development comes after reports citing sources said that Fried secretly moved $10 billion of FTX customer funds to Alameda Research. Of this, a major chunk worth ₹1.7 billion has gone missing.

Following this, FTX put out a statement on its Telegram channel that the crypto exchange has been hacked and a financial discrepancy has been witnessed during the transfer of its funds worth $600 million. After the announcement, the crypto exchange filed for bankruptcy.

Amid the clamour, Fried and nine others, including an Indian-origin techie Nishad Singh, are being under SEC's scrutiny for financial discrepancy at the crypto exchange that ultimately led to its collapse.

According to reports, Singh was in the inner circle of Fried and controlled the code, the machine engine and the fund at the crypto exchange.

All these developments led to Changpeng Zhao-led Binance, which until last week had plans to acquire FTX, calling off the deal citing “corporate due diligence.”

The liquidity crunch of FTX has once again started the debate regarding the safety in using digital currency and the regulations in the crypto market. Here is a look at the events which ultimately led to the collapse of FTX. 

What is FTX crypto exchange?

Founded in May 2019 by Fried, a former Wall Street trader and ex-Google employee Gary Wang, FTX is a crypto exchange based out of the Bahamas. A crypto exchange is a virtual platform that allows the users or investors to swap or trade digital currency in exchange for government-regulated money.

FTX, at its peak, was valued at $32 billion and is backed by existing investors like Ontario Teachers’ Pension Plan, Tiger Global, Temasek and Softbank Vision Fund. In 2019, the crypto exchange, for the first time raised $900 million at a valuation of $18 billion. FTX has its native cryptocurrency token, FTT, which the traders use for operations.

How FTX ran into trouble

On November 2, CoinDesk, a crypto news website reported close links between Alameda Research and FTX as the now-leaked balance sheets of the hedge fund showed unusually heavy amounts of FTT tokens. Both, despite being owned by Fried, Alameda Research and FTX are supposed to be two different entities.

Following the CoinDesk report, on November 6, Binance announced that it would sell its FTT tokens due to “unspecified recent revelations.” In the aftermath to Binance’s announcement, the trading in the crypto platform surged to an unusual high, with traders pulling out $6 billion from the exchange amidst panic. As a result, the crypto exchange witnessed a liquidity crunch.

In order to protect its customers from the liquidity crunch, FTX announced that it has entered into a strategic transaction with Binance. Fried in a tweet said, “Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in.”

Zhao confirmed the news over Twitter, saying that it has signed a non-binding letter of intent (LOI) with FTX, intending to fully acquire FTX, adding that Binance has the discretion to pull out from the deal any time.

However, on November 9, Binance withdrew from the deal. Binance in a tweet said, “As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com.”

How did the crypto market react?

The crypto market has long struggled to convince regulators on cryptocurrency. Following the developments over the weekend, the prices of other crypto currencies witnessed a mixed trend on Monday on CoinDesk. At 13:50 pm, the price of Bitcoin surged 0.75% at $16,808, whereas Ethereum surged 1.76% at $1,264. Meanwhile, XRP plunged 2.34% at $0.34, whereas Dogecoin surged marginally by 0.35% at $0.08. Shiba Inu tanked 0.84%.