The failure of FTX has left a deep groove in the cryptocurrency market. Investor doubts about the sector had already risen after the implosion of the TerraUSD stablecoin and its related LUNA token, followed by the bankruptcies of digital currency lender Celsius, Digital Voyager exchange, and hedge fund Three Arrows Capital. The wound inflicted by FTX runs deeper, as the crypto company was now seen as the savior of the crypto world.
His boss, 30-year-old billionaire Sam Bankman-Fried, had become the white knight everyone would turn to to turn things around. Lender BlockFi knows something about it, sunk under crypto crashes and brought to the surface by a $250 million angel funding from FTX. Digital Voyager also received 460 million dollars from the company headed by Bankman-Fried to avoid resorting to Chapter 11 of the US bankruptcy law. No one would have imagined that FTX would be in a worse condition.
FTX: the reasons for a catastrophe
The drama began on Sunday, November 6, when Binance CEO Changpeng Zhao suspiciously tweeted about the financial situation of Alameda Research, a trading company affiliated with FTX. Panic ensued in the cryptocurrency market, with investors withdrawing around $430 million worth of Bitcoin from the exchange between November 6 and 9. Alameda Research conducted speculative transactions using money that clients deposited into FTX without the clients’ knowledge.
In addition, Alameda’s activities were based on the FTT token, issued by FTX itself, which has almost completely canceled its value. According to the data provided by CoinDesk, the trading company’s balance sheet was full of FTT tokens. As of June 30, 2022, Alameda was reported to have $3.66 billion in FTT unlocked, plus $2.16 billion in collateral. In addition, there was $1.2 billion in interests in Solana. The CoinDesk report led Binance to announce that it would sell its $2.1 billion stake in FTT, sparking a sell-off.
FTX: Binance ransom attempt and withdrawal
The FTX situation turned out to be more dire than might have been thought. The Bahamas-based exchange has reported an $8 billion financial hole, but the latest updates speak of at least $10 billion. The collapse of the crypto giant risks generating a massive earthquake in the cryptocurrency sector. To prevent this, Binance had come forward. On Nov. 8, Binance chief Zhao and Bankman-Fried reached a non-binding agreement for Binance to acquire FTX, but after viewing company accounts with intent to buy, Zaho backed out. Due diligence lasted a day, time to turn around in the face of so many suspicious activities. Also, Regulatory Authorities were all over the exchange. Not being able to honor FTX withdrawals has blocked them and now clients fear they will never get their money back.
FTX: Filing the Bankruptcy Petition
On November 11, FTX had no choice but to file for bankruptcy in Delaware Court, and Sam Bankman-Fried resigned as head of the company, to be replaced by bankruptcy expert John Ray. At the same time, the Bahamian authorities have frozen the company’s assets and it has emerged that FTX’s creditors could exceed 1 million. Other crypto companies like Genesis and Gemini that are exposed to FTX catch it by blocking withdrawals, while the hypothesis of an industry-wide domino effect becomes more and more concrete.
A Delaware court document was filed Nov. 20 stating that FTX’s top 50 creditors have a total credit of more than $3 billion. The names of these entities have not been released, but they include hedge funds and large investment companies. Those who are generally known to have invested in the crypto firm include BlackRock, Sequoia Capital, Tiger Global, and the Ontario Teachers’ Pension Plan. New director John Ray said: “Never in my career have I seen such a complete failure of corporate oversight and such a blatant lack of reliable financial information as has occurred.”
A class action lawsuit has been filed against bankruptcy
Important figures from the world of sports and entertainment have joined a class action lawsuit in Florida against the bankruptcy of FTX. Among the names emerge Stephen Curry, Shaquille O’Neil, Naomi Osaka and Tom Brady. According to the indictment, the company used a fraudulent fundraising scheme, exploiting some of the most illustrious figures in sports and entertainment.
Is there any hope of recovering money?
Word has been circulating in the chat rooms of investors who have lost money with FTX that a guarantee fund could cover the losses. The fund exists and was created in Cyprus, where the company FTX Europe was registered a few months ago. According to European directive 97/9, the Cypriot investment companies that created the fund could cover up to 20,000 euros for each creditor.
However, there are two types of problems. The first is that FTX Europe is governed by European law; therefore, it is necessary to distinguish which are the investors that have a direct relationship with this company and which instead with the company incorporated under US law. The second is that the fund only covers cash deposits and financial products. Therefore, it does not appear that cryptocurrencies and NFTs are included as assets, since they are not considered financial instruments.