FTX Trading Ltd., commonly known as FTX (short for Futures Exchange) was a cryptocurrency exchange and crypto hedge fund that filed for bankruptcy in November 2022 following a liquidity crisis. It was founded in April 2019 by Sam Bankman-Fried and Gary Wang. ^[10]

FTX was at its peak in July 2021 with over one million users and was the third-largest crypto exchange by volume. On November 11, 2022, FTX filed for Chapter 11 Bankruptcy in the US, leading to the resignation of CEO Sam Bankman-Fried. It was discovered that FTX owed $9 billion in liabilities while holding under $1 billion in assets prior to its bankruptcy filing. ^[1][5]

History

Launched in April 2019 by Sam Bankman-Fried a former trader on Jane Street Capital’s international ETF desk, and Gary Wang, a former Google software engineer, FTX began within Alameda Research, a trading firm founded by Bankman-Fried, Caroline Ellison, and other former employees of Jane Street in 2017, in Berkeley, California. ^[3]

The exchange provided its users access to a range of trading products including Bitcoin options, over 45 leveraged tokens, 20 perpetual swaps, and prediction markets. The platform also provided an over-the-counter service for anyone interested in making large crypto purchases. ^[3[2]

Changpeng Zhao of Binance purchased a 20% stake in FTX for approximately $100 million, six months after Bankman-Fried and Wang started the firm. Bankman-Fried later bought out Zhao's stake for approximately $2 billion. In August 2020, FTX acquired Blockfolio, a crypto portfolio tracking app, for $150 million. ^[11][12]

In September 2021, FTX moved its headquarters from Hong Kong to The Bahamas. ^[14]

In February 2022, it was reported that FTX was creating a gaming division that would help developers add cryptocurrency, NFTs, and other blockchain-related assets into video games. In July 2022, FTX finalized a deal giving it the option to buy BlockFi for about $240 million. The deal included a $400 million credit facility for BlockFi. ^[16][17]

In August 2022, the Federal Deposit Insurance Corporation (FDIC) issued a cease-and-desist order to FTX for making "false and misleading representations" about deposits being covered by FDIC insurance following FTX president Brett Harrison's tweet implying otherwise. Following the regulatory action, Harrison deleted the tweet and Bankman-Fried clarified in another tweet that FTX deposits are not insured by the FDIC. ^[18]

On September 26, 2022, FTX.US won its bid at auction for the digital assets of bankrupt crypto brokerage Voyager Digital. The value of the deal was approximately $1.42 billion, including $1.31 billion in Voyager-held crypto and $111 million in additional consideration. The deal was subject to approval by bankruptcy courts and Voyager's creditors. Following the FTX bankruptcy, in Dec. 2022, the US subsidiary of Binance won the bid to buy the assets of Voyager for approximately $1 billion. ^[19][20]

On September 27, 2022, FTX.US President Brett Harrison announced he would be stepping down from an active role at the exchange but would stay on in an advisory capacity. In October 2022, it was reported that FTX was under investigation in Texas for allegedly selling unregistered securities. ^[21][22]

Funding Rounds

FTX raised a total of $1.8B in funding over 7 rounds. Its last funding was raised on March 21, 2022. In July 2021, the venture raised $1 Billion at an $18 billion valuation from 24 investors, including Softbank, Sequoia Capital, and other firms. ^[13]

In October 2021, FTX raised $420.7 Million in a Series B funding round from Ontario Teachers' Pension Plan, Sequoia Capital, etc. In January 2022, FTX announced a $2 billion venture fund named FTX Ventures, raising $400 million in Series C funding at a $32 billion valuation that month from 12 investors including SoftBank Vision Fund, Temasek Holdings, etc. In March 2022, an undisclosed amount was raised in a Venture round with Naomi Osaka. ^[13][15]

FTX and Alameda Research Collapse

In November 2022, FTX was accused of using customer funds and suffered a liquidity crunch, leading to its native FTT token crash and the firm’s bankruptcy. ^[8]

On November 2nd, 2022, CoinDesk published a report based on a leaked Alameda Research balance sheet which showed Alameda claiming to have $14.6 billion of assets as of June 30, 2022, of which most were reviewed to be majorly FTT tokens. The cryptocurrency lost about 10% in price on November 6th, 2022 after Binance CEO Changpeng Zhao announced it would liquidate its FTT holdings worth over $580 million. ^[8]

This forced FTX to stop customer withdrawals on November 8, 2022. An article by the Wall Street Journal, citing people familiar with the matter, claimed FTX used billions of dollars worth of customer funds on risky bets to help support Alameda.^[8]

Anonymous sources stated that, earlier in 2022, Bankman-Fried had transferred at least $4 billion from FTX to Alameda Research, without any disclosure to the companies' insiders or the public. The sources said that the money transferred included customer funds and that it was ostensibly backed by FTT and shares in Robinhood. ^[23]

An anonymous source cited by the Wall Street Journal also stated that Bankman-Fried had disclosed that Alameda owed FTX about $10 billion which was secured through customer funds held by FTX when FTX had, at the time, $16 billion in customer assets. The Chief Executive of Alameda Research Caroline Ellison told employees that Bankman-Fried was aware that FTX had lent its customers’ money to Alameda to help it meet its liabilities. ^[23]

On November 11, 2022, FTX filed for Chapter 11 Bankruptcy in the US, leading to the resignation of CEO Sam Bankman-Fried who was replaced by  John J. Ray III. It was discovered that FTX owed $9 billion in liabilities while holding under $1 billion in assets before its bankruptcy filing.^[8]

In court documents, John J. Ray III described FTX as the worst case of financial mismanagement he had ever seen. ^[9]

"I have over 40 years of legal and restructuring experience. I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history. I have supervised situations involving allegations of criminal activity and malfeasance (Enron). I have supervised situations involving novel financial structures (Enron and Residential Capital) and cross-border asset recovery and maximization (Nortel and Overseas Shipholding). Nearly every situation in which I have been involved has been characterized by defects of some sort in internal controls, regulatory compliance, human resources and systems integrity.

Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented."^[9]

Also, on November 12, 2022, FTX admins announced on Telegram that the platform has been hacked. The hacker had drained 400 billion Shiba Inu tokens worth $3.9 million and swapped them for Ethereum gaining 2,346 ETH. A day after, the hacker swapped $48.2 million worth of DAI stablecoins for 37,570 ETH. The hacker also converted $41 million in BNB to ETH, among an array of other tokens. ^[6]

On November 17, 2022, The Securities Commission of The Bahamas said it ordered all FTX Digital Markets Ltd (FDM) digital assets transferred to a digital wallet controlled by the Commission for Safekeeping.^[7]

Investigations & Arrests

Following FTX's collapse, the Royal Bahamas Police Force launched a criminal investigation into the company. On 15 November 2022, a class-action lawsuit was filed in Miami against Bankman-Fried and several celebrities, including American football quarterback Tom Brady and comedian Larry David, alleging the company engaged in deceptive practices. The lawsuit also named Gisele Bündchen, Steph Curry, Shaquille O'Neal, Udonis Haslem, David Ortiz, Trevor Lawrence, Shohei Ohtani, Naomi Osaka, and Kevin O'Leary. ^[24]

On 13, December 2022, Founder Bankman-Fried was arrested in his apartment in the Bahamas by the Royal Bahamas Police Force. The arrest was made in response to charges brought against him by the Southern District of New York, including "wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy, and money laundering." ^[26]

Bankman-Fried was extradited to the U.S., then indicted by U.S. District Court in Manhattan on eight counts, including securities fraud and money laundering. Following a court hearing on Dec. 22, 2022, a federal judge decided to release Bankman-Fried from custody after his attorneys and federal prosecutors agreed to a $250 million bond. ^[33]

On 21, December 2022, both Caroline Ellison (former CEO of Alameda) and Gary Wang (former Chief Technology Officer of FTX) pled guilty to fraud and other charges and agreed to cooperate with federal investigators in the criminal case against Bankman-Fried. ^[25]

FTX's former engineering director, Nishad Singh, pled guilty to six different charges, including three counts of conspiracy to commit fraud. Singh is a childhood friend of Bankman-Fried's brother and worked at Alameda Research before being brought into FTX. ^[32]

Impact of FTX Bankruptcy on Firms & Investors

On 16, November 2022, the crypto brokerage service Genesis suspended withdrawals following FTX declaring bankruptcy, further affecting the industry. The cryptocurrency exchange company Gemini, owned by Cameron and Tyler Winklevoss, announced that it would be pausing withdrawals on its Earn program, which uses Genesis as a lending partner. ^[27]

The exchange token of Crypto.com, Cronos, lost approximately $1 billion in value in November 2022. ^[28]

Institutional investors that lost money due to their stakes in FTX include Tiger Global Management, the Ontario Teachers' Pension Plan, SoftBank Group, BlackRock, Lightspeed Venture Partners, Temasek, and Sequoia Capital. Sequoia released a notice to investors, also published on Twitter, assuring them the firm's stake in FTX represented a small amount of its overall portfolio, and replaced a profile of Bankman-Fried published on the firm's website with a link to the same notice. The Ontario Teachers' Pension Plan released a similar statement. ^[29][30][31]

FTX Sue Sam Bankman-Fried

On July 21, 2023, FTX sued former CEO Sam Bankman-Fried and other former key executives from the crypto exchange to recover more than $1 billion in allegedly misappropriated funds. A complaint filed in a United States Bankruptcy Court named former Alameda Research CEO Caroline Ellison, FTX co-founder Zixiao “Gary” Wang, former FTX engineering director Nishad Singh and Bankman-Fried as defendants. ^[37]

In the lawsuit, FTX claimed the former executives breached their fiduciary duties by allegedly misappropriating customer funds on a “continuous basis to finance luxury condominiums, political and ‘charitable' contributions, speculative investments and other pet projects.” Additionally, the lawsuit alleged they “abused their control” over FTX and its related companies to commit “one of the largest financial frauds in history.” ^[37]

FTX also alleged the former executives issued more than $725 million worth of equity to themselves, “without [debtors] receiving any value in exchange.” FTX claimed Bankman-Fried and Wang misappropriated an additional $546 million to purchase shares in the trading platform Robinhood. ^[37]

The filing alleged Ellison paid herself $28.8 million in bonuses and used $10 million of the funds to purchase a stake in an artificial intelligence company. FTX also alleged that on Jan. 24, 2022, Bankman-Fried transferred $10 million as a “gift” from his FTX US account to his father's account on the same exchange. While FTX initially prohibited accounts carrying a negative balance, Bankman-Fried allegedly directed his associates to modify the exchange’s code. ^[37]

“In or around July 2019, Bankman-Fried directed one or more of his co-conspirators or individuals working at their behest to modify the software to permit Alameda to maintain a negative balance in its account on the exchange.”^[37]

Plans to Relaunch

On August 1, 2023, FTX confirmed its plans to relaunch the exchange. The organization outlined its intended reorganization plan, which will categorize claimants of the bankrupt exchange into specific classes and pave the way for the exchange to become operational as an offshore entity.^[34][36]

Dockets filed on July 31, 2023, include a draft plan of reorganization that outlines the company’s intended path to settle an “exceptionally large and complicated collection of claims.” ^[35]

"We are pleased today to deliver on our commitment to file the Plan at this relatively early stage – before the expiration of the customer bar dates, the completion of our pending investigations and the preparation of a disclosure statement.
This is expected to facilitate creditor feedback to further discuss open issues in the Plan with stakeholders, including the unsecured creditors committee, the ad hoc committee of non-U.S. customers and other parties with whom we have been in discussion. Our goal is to achieve a consensual plan and emergence from bankruptcy.

We are committed to working through these matters in the third quarter of 2023 and to filing an amended plan and a disclosure statement in the fourth quarter of 2023." - John J. Ray III, Chief Executive Officer and Chief Restructuring Officer of the FTX Debtors

The final section of the proposed plan covers the intent to liquidate the estates of FTX to payout distributions to customers and creditors in cash. However, a clause notes that customers may be offered voluntary elections in connection “with a restart of an offshore exchange.” ^[38]

FTX's Official Committee of Unsecured Creditors (UCC) expressed being "extremely disappointed" with FTX's draft bankruptcy exit plan, claiming that their input was disregarded by FTX's restructuring team. Despite requesting meetings and assurances from the team, the UCC stated that they had not engaged in any discussions regarding the draft Chapter 11 plan. They warned of presenting their own plan for FTX customers to vote on if their concerns continued to be overlooked. ^[39][40][41]

The UCC was concerned about the timing of the plan's filing, which they perceived as delayed progress. They noted that the plan appeared one-sided and neglected the suggestions they had raised during discussions. FTX's restructuring team acknowledged the UCC's grievances and expressed readiness to incorporate their recommendations, indicating that negotiations would begin shortly. ^[40]