In just a few years, Sam Bankman-Fried called SBF managed to create the third largest cryptocurrency platform, FTX, and amassed a fortune of almost $30 billion. At the start of the cryptocurrency price drop, he provided loans to companies in this struggling industry. He then made loans to Voyager and BlockFi and recovered assets from Three Arrows, a cryptocurrency hedge fund that had gone bankrupt. These interventions seemed to demonstrate the strength of his platform. SBF had become, over the years, a sought-after patron. He has supported political campaigns on regulating cryptocurrencies and has said he plans to donate some or all of his fortune to charity to safeguard the future of humanity.
Bitcoin lost 20% in three days
The entire FTX building collapsed within days. Rumors of the company’s insolvency led to clients withdrawing 650 million assets on Nov. 7 hosted at FTX, forcing the firm to halt trading in cryptocurrencies. The value of one FTX token, a profit-sharing asset of the firm, has lost 90% since Nov. 4.
After plans to take over FTX, Changpeng Zhao, the leader of Binance, the largest cryptocurrency exchange, withdrew on Nov. 8, ahead of potential losses of more than $8 billion. According to Bloomberg Wealth, FTX was worth less than $1 billion on Nov. 10, down 94% in one month. This fall caused a further decline in bitcoin, which lost almost 20% of its value between November 9 and 12, 2022, thus falling to $16,000.
FTX has held an important position in the cryptocurrency world. Its failure can lead to others. Few companies have the opportunity in this poorly regulated market to take over the FTX business and clean up the market.
The downfall of SBF is related to a fairly classic Ponzi pyramid trial. Bankman-Fried owns three companies: FTX, a platform that serves as a global cryptocurrency exchange; FTX.us, the US-focused platform (sort of like an American stock exchange); and Alameda Research, a cryptocurrency trading fund. In theory, these companies are distinct. On Nov. 2, CoinDesk, a news site, reported that the market-issued tokens accounted for two-fifths of Alameda’s assets and were worth $5.8 billion. Alameda has reportedly borrowed money from FTX to secure the value of its tokens. Binance, the competitor of FTX, announcing its intention to part with the FTX tokens which were then worth more than half a billion dollars revealed the pyramid and caused a domino effect. Some believe that the Binance executive who wanted to take over FTX knowingly caused this panic to depreciate its value. The latter’s change of stance on the discovery of FTX’s losses seems to indicate that the problem of this company was not limited to the exchanges of tokens and loans between SBF companies. The platform appears to have allowed Alameda to borrow by pawning customer assets through a deposit of FTX tokens, issued by the platform itself as collateral. The decline in the value of FTX tokens has led the company to no longer have sufficient resources to cover the debts it has incurred with its customers.
Investigations and legislation
Regulators are monitoring the consequences of the FTX failure evaluate the risks of a domino effect. The Securities and Exchange Commission, the main American financial regulator, had launched a few months ago an investigation into the management of funds by FTX, as well as into the links between companies belonging to SBF. The US Justice Department is also reportedly investigating FTX. In France, the Autorité des Marchés Financiers sent a list of questions to around fifty operators connected to the platform to assess the consequences for its clients.
Start-ups operating in the cryptocurrency market try to reassure their customers. Coinbase, another exchange, said it had no connection to FTX. This disclosure did not prevent its share price from falling by more than 20%.
The crypto-asset sector fears a tightening of regulations with a more marked presence of regulatory authorities. FTX’s failure is expected to leave lasting scars on the booming world of digital assets.