FTX cryptocurrency exchange declares bankruptcy with an estimated $8 billion in losses

What is the FTX cryptocurrency exchange?

The FTX cryptocurrency exchange allowed users to buy, trade, and sell cryptocurrencies by storing them in a digital wallet through their account with FTX. Sam Bankman-Fried and Gary Wang started the FTX cryptocurrency exchange in May 2019. It grew quickly, becoming one of the top three cryptocurrency exchanges in the world by volume within just a few years.

Cryptocurrency exchanges have grown rapidly as cryptocurrency has gained popularity. In a typical cryptocurrency exchange, traders trade fiat currency for cryptocurrency. Users can purchase additional cryptocurrency, trade cryptocurrency, or exchange cryptocurrency for fiat currency. Cryptocurrency exchanges make money by charging users a small transaction fee for these trades.

FTX’s explosive growth was fueled by its perceived stability, partly caused by prolific advertising, such as Super Bowl advertisements, YouTube influencers’ endorsements, and Sam Bankman-Fried’s public donations to charities and politicians. However, FTX’s apparent credibility was not a true reflection of what was going on behind the scenes.

Centralized vs. decentralized exchanges

An important note about cryptocurrency exchanges is that there are two different types: centralized and decentralized. A centralized exchange is like a custodian that holds money, similar to how a bank holds money. It acts as a go-between and helps create smoother transactions between the blockchain and users. This type of exchange can be more user-friendly, especially for people just beginning to explore cryptocurrency.

Decentralized transactions, on the other hand, facilitate direct trading between peers. Instead of the exchange taking custody of the cryptocurrency, users connect their cryptocurrency wallets and retain full control of their assets. While these exchanges allow users to maintain access to their money, they can also be more difficult to understand.

This distinction is important because the FTX cryptocurrency exchange was a centralized exchange. As a result, FTX could take people’s money and use it for something else, which is exactly what happened with the FTX exchange.

Misuse of users’ funds

On Nov. 2, 2022, CoinDesk published an article revealing that Alameda Trading Company, the trading arm of Sam Bankman-Fried’s billion-dollar cryptocurrency conglomerate, held a balance sheet heavily weighted in FTT, FTX’s cryptocurrency. Of its $14.6 billion in assets, over $5 billion consisted of locked and unlocked FTT and FTT collateral. These funds propped up Alameda, making it look more profitable than it was.

Alameda borrowed however much money it needed from FTX, which came directly from customer deposits. Since FTX was a private company, its balance sheets were never audited.

Through Alameda, Sam Bankman-Fried allegedly used FTX money to place bets in the cryptocurrency market. He also allegedly purchased over $250 million in luxury real estate for Alameda executives, along with other blatant misuses of users’ funds.

However, after the article by CoinDesk, FTX lost value quickly. Investors began trying to withdraw their money, but FTX did not have enough to cover the spread. FTX began blocking customers from withdrawing their money on Nov. 8, 2022, and by Nov. 12, 2022, the company had declared bankruptcy.

Challenges with cryptocurrency exchanges

FTX is not the only cryptocurrency exchange facing challenges. Over the years, dozens of other centralized cryptocurrency exchanges have also collapsed. Some more prominent failures include Cryptopia, Mt. Gox, and Bitfinex. However, the FTX bankruptcy is under particular scrutiny due to its size and the far-reaching implications the collapse has had.

According to the Congressional Research Service, “Regardless of jurisdiction, the events at FTX are relevant because they shine a light on practices by U.S.-based exchanges that may be of interest to Congress. The first is whether these firms, which face fewer regulations than traditional securities exchanges and operate as both exchanges and broker-dealers, face a conflict of interest. Moreover, unlike traditional brokers, which must segregate customer funds, crypto exchanges may have commingled funds, which could make it difficult for customers to recover funds if the exchange were hacked or went bankrupt.”

Since cryptocurrency exchanges are not under the same level of scrutiny as other exchanges, such as the New York Stock Exchange, they do not have to provide any information about how they handle customers’ money. This lack of oversight and a paper trail means that unraveling the mishandling could be arduous.

John J. Ray III, the new CEO of FTX tasked with overseeing its liquidation, said, “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.”

Are there different types of cryptocurrency?

One of the most well-known cryptocurrencies is Bitcoin, the first cryptocurrency. It was created in 2009 with a value of about $0.0009, and its value peaked at just under $62,000 in October 2021. After Bitcoin’s rise, cryptocurrencies became ubiquitous. More and more cryptocurrencies were invented, and cryptocurrency exchanges also began popping up.

According to CoinMarketCap, over 23,000 cryptocurrencies are currently available on the market. Besides Bitcoin, other more common currencies are Ethereum, Tether, and Binance Coin.

Unlike fiat currency, such as dollars, euros, pounds, etc., cryptocurrency is a digital currency secured by cryptography. It is nearly impossible to counterfeit, and users can trade currency peer-to-peer without using an intermediary, such as a bank. Despite this capability, many users still prefer to trade through exchanges.

The impact of FTX

Sam Bankman-Fried was seen by many as a modern-day J.P. Morgan. When other exchanges failed, he offered to bail them out by buying their companies or offering credit, similar to the way J.P. Morgan helped bail out banks in the 1907 banking collapse before the creation of the Federal Reserve guaranteed depositors’ funds. He was even an unlikely advocate for more regulation, stating that he regularly met with lawmakers to encourage more legislation for cryptocurrency exchanges.

Sam Bankman-Fried was seen as a credible source, and, on paper, the FTX cryptocurrency exchange seemed to be a reliable partner for anyone who wanted to trade cryptocurrency. However, Sam Bankman-Fried’s statements about the importance of regulation and transparency did not align with the actions of the FTX exchange and its dealings with Alameda.

Celebrity and influencer endorsements lead to lawsuits

Another key factor in FTX’s ride to fame was the sheer number of advertisers and big-name celebrity endorsers FTX used to promote its exchange.

In 2017, the Securities and Exchange Commission warned that persons promoting yield-bearing accounts that were found to be securities could be prosecuted for promoting unregistered securities and/or failing to disclose their compensation. Stars such as Shaquille O’Neill, Tom Brady, and Stephen Curry are the subject of a class action suit alleging that the celebrities lent their credibility to the exchange, making them “responsible for the many billions of dollars in damages they caused.”

A separate $1 billion class action suit has also been filed against influencers, most of them on the YouTube platform, alleging that the defendants accepted sponsorships and endorsements from FTX without divulging the nature and scope of their involvement.

Besides endorsements from stars and influencers, FTX also heavily promoted its platform through Super Bowl advertisements. It even purchased the naming rights to the Miami Heat stadium, which was named the FTX Arena in 2021 after a $135 million naming rights deal. These promotions added to FTX’s perceived credibility and drove even more users to the platform.

Enormous global losses

Global losses from the bankruptcy of the FTX cryptocurrency exchange are estimated to be in the billions of dollars. Whether or not these celebrities and influencers will be held liable for their promotion of FTX remains to be seen; however, more stars are pausing before signing endorsement deals with other crypto-related businesses.

FTX’s finances are still being unraveled, but estimated customer losses could be around $8 billion. The misuse of funds has been called the biggest Ponzi scheme of all time, and consumers around the globe have suffered due to this mismanagement.

Frequently asked questions about FTX

Can I withdraw my deposited funds from FTX?

Since FTX is in bankruptcy proceedings, users cannot withdraw any funds they had in the exchange. The best way to recover any funds you have on the FTX platform is by contacting our attorneys to see if you qualify for relief.

Can I file an FTX lawsuit?

Users who have been unable to withdraw their funds can contact our attorneys to see if they qualify for relief through a lawsuit. If you experienced financial losses due to the bankruptcy of the FTX exchange, you deserve to be made whole.