Collapse Of Crypto Exchange FTX Leaves Unanswered Questions

The collapse of the mega crypto exchange FTX on 11 November 2022 leaves a number of unanswered questions. How did the exchange get to become so prominent when it was clearly not well managed? How was the exchange structured and just why did it collapse? Investors in the exchange have been left in limbo as they try to extract their crypto assets and founder, Sam Bankman-Fried, has seen his own personal fortune dwindle from $16bn to zero .

How Did FTX Collapse?

FTX was one of the world’s largest cryptocurrency exchanges and was set up by Bankman-Fried in 2019, at a time when cryptocurrencies were thriving and huge crypto fortunes were being made. Just some of FTX’s competitor exchanges include Kraken, Gemini and Coinbase.

Although the core of the FTX business was the exchange, the company also consisted of more than 100 inter-related companies all led by Bankman-Fried and his co-founders.

Alameda Research was just one of these inter-related companies owned by Bankman-Fried and the FTX empire started to unravel in November when Coinbase published an Alameda balance sheet which illustrated that the crypto investing fund held a large balance of the FTX currency FTT.

Analysts pointed out that although the FTT holdings had a certain value, if the value were to drop the company would be in serious trouble and at risk of insolvency.

The Coinbase news release suggested that Alameda was making risky loans with FTT. It seems that over a three-year period, Alameda had acquired around $8bn of FTX customer funds and frequent losses on trades paint a depressing picture.

FTX Run

The Coinbase press release caused a run on FTX as investors rushed to withdraw their holdings. Unfortunately, the crypto exchange could not honour these withdrawal requests as it was struggling to source up to $8bn of customer funds that had been diverted to Alameda Research.

FTX customers have been warned that they will join the queue of creditors waiting for recompense from the exchange and will receive no special treatment. Meanwhile, anonymous sources have claimed that the FTX collapse will be the subject of a Securities & Exchange Commission investigation.