FTX: The Cryptocurrency Giant’s Sudden Rise and Downfall

The cryptocurrency exchange, FTX, was heralded by the darling of the cryptocurrency community with its peak reaching a $32 billion valuation. As FTX offered derivatives products and spot trading, its founder and CEO Sam Bankman-Fried soon became known as a crypto wunderkind with a penchant for philanthropy and calling forth for industry regulation. However, in November 2022, FTX began to slowly collapse over 10 days when crypto news outlet, CoinDesk, revealed that most assets in Alameda Research, a quantitative trading firm run by Bankman-Fried, “consisted of FTT, a token created by FTX that allows users of the exchange to assess discounted trading fees.” Regulatory authorities launched investigations following concerns of market manipulation and conflicts of assets, scrutinizing both companies’ business practices and compliance with existing financial regulations. As a result, FTX underwent a series of legal and operational changes aimed at restoring trust in its platform. Bankman-Fried, once celebrated as a crypto visionary, found himself embroiled in a legal battle to defend his company’s reputation and integrity. In the wake of these legal updates, the cryptocurrency community awaited further regulatory decisions that would shape the future of FTX and the broader crypto industry. The events surrounding FTX serve as a stark reminder of the challenges and complexities facing cryptocurrency exchanges in an evolving regulatory landscape.

Sam Bankman-Fried, commonly referred to as SBF, stood out as a prominent figure in the crypto world as the leader of FTX, transcending the confines of Silicon Valley to make a mark in popular culture. He was featured on billboards and magazine covers like Forbes and Fortune for his contributions to the cryptocurrency community, recognizing the need for regulations. He was also friends with a variety of celebrities such as Tom Brady and Larry David, having them promote his exchange in a Super Bowl ad. Despite his background of attending MIT and working in finance before launching FTX, SBF claimed that the reason for his estimated $26 billion wealth was “for others” and planned on “giving away 99% of his wealth.” SBF’s altruistic image continued with his donations to candidates of the U.S.’ Democratic Party and organizations related to animal rights and pandemic preparedness. SBF’s curated image as a tech entrepreneur with a conscience extended to his desire for regulations in cryptocurrency—a belief that went against the crypto community, going as far as testifying in front of Congress to advocate for additional regulations and guidance. How SBF presented himself to the public characterized himself as “the adult in the crypto” space despite him being 30 years old, ultimately embodying “the face of crypto” to politicians and Wall Street. SBF’s good-standing reputation was also supplemented by his parents who were Stanford law professors, creating the veneer of legitimacy in FTX as a reliable cryptocurrency exchange and faith in SBF’s leadership. SBF’s careful crafting of his public image has undoubtedly positioned him as a titan in the crypto industry, leveraging the legitimacy of his upbringing and ethical stance to resonate with a wide audience. However, this meticulous image management has also cast a veil over the actual operations and practices of FTX.

FTX was born out of SBF’s observation that some cryptocurrency coins were “selling for higher prices on some exchanges than others,” prompting him to realize that he could employ his arbitrage skills to “exploit the gaps in prices.” By 2017, SBF launched Alameda Research, a crypto-trading firm based in Berkeley, California, that moved “almost $15 million a day between markets” at its height. The success of Alameda Research gave SBF the nickname “Moby Dick of crypto whales” due to the “waves he was making in the crypto industry.” According to Insider, he made the abrupt decision to move Alameda from the U.S. to Hong Kong as Hong Kong’s regulations were “lax[er]” than the U.S.; one colleague recalled that Alameda was “losing $50,000 a day by not working out of Hong Kong instead of Berkeley.” As Alameda continued to grow, SBF’s ambitions gravitated towards creating an alternative to the inefficient exchanges he participated in 2017 and 2018—leading to the creation of FTX in May 2019. From its launch, FTX was hailed as a success as it had “cost-effective features like low-trading fees and offered several types of coins for traders to bet on.” Beyond those features, FTX’s product range and accessible design made it popular among all crypto investors, offering a “comprehensive range of order types.” In addition, FTX supported 9 fiat currencies for investors: “the U.S dollar, Euro, British pound, Australian dollar, Canadian dollar, Swiss franc, Brazilian real, Ghanian cedi, and Argentine peso.” However, some fiat currencies were permitted with restrictions such as the Hong Kong dollar, Singapore dollar, and South African rand.

As one of the world’s largest cryptocurrency exchanges, FTX relied on the credibility of its founders—Sam Bankman-Fried, Gary Wang, and Nishad Singh—to conduct its operations internationally and in the U.S. In terms of regulations, FTX is incorporated in Antigua and Barbuda with its headquarters based in the Bahamas where it falls into the regulations of the Securities Commission of the Bahamas. And so, U.S. residents do not use FTX, but rather FTX.US which was launched in 2020. FTX was also backed by some of the most high-profile venture capital investors in Silicon Valley like Sequoia Capital, adding to the prominence of FTX’s veneer. John Ray III, a bankruptcy specialist who dealt with the aftermath of Enron, described FTX’s operations in 4 “silos”: a “venture capital company” investing in various businesses; a “hedge fund” that “traded crypto for profit”; “and 2 exchanges” that dealt with various regulations (1 specifically for U.S. regulations). As people would buy cryptocurrency by giving fiat currency at an exchange, this meant that they were buying one currency while simultaneously selling another. By offering such a service, FTX would take a cut in every transaction to generate revenue. However, the high profits came from “much more aggressive trading on the international exchange”—FTX where traders would capitalize on price fluctuations in crypto, “borrowing money to increase their potential earnings (or losses).” However, the cause of its downfall was primarily based on a crypto token that FTX issued—FTT. This could be understood as a “share in FTX that the company issued itself and promised to buy back using a portion of its profits.” However, CoinDesk reported that SBF’s hedge fund, Alameda, used FTT as collateral to make risky loans—“effectively trading using company scrip”—and in turn, prompted for Binance, a rival exchange holding a major amount of FTT, to sell all the FTT it possessed. Despite the chaos, SBF continued to persist in his narrative that FTX was stable by tweeting that “FTX is fine” and “Assets are fine.” This announcement made by Binance CEO, Changpeng Zhao, ultimately created a classic bank run where many FTX customers tried to withdraw their funds immediately out of fear. Consequently, FTX “did not have enough money on hand to pay them out,” leading all of SBF’s ventures to declare bankruptcy on November 11, 2022.  

The collapse of FTX was not exclusive to the company itself as shock waves were experienced from regulators to industry insiders, damaging the reputation of cryptocurrency as a whole. Some crypto users deemed FTX’s fall as a win for “decentralized finance,” also known as DeFi, a form of finance that “uses computer code to build versions of financial services that don’t rely on trust or a central party” like FTX. Beyond the crypto space, FTX’s collapse further proves the point that cryptocurrencies are a gamble that requires stringent enforcement of regulations. Now, FTX had joined the ranks of Terra and Celsius, fellow cryptocurrency companies that were experiencing a series of mishaps in “crypto winter.” SBF’s fall from grace was rapid from one of the richest people in the world to a failed businessman and investor with a net worth of 0; bankruptcy professor at Harvard Law, Jared Ellias, stated that “The velocity of this failure is just unbelievable.” According to insiders, the surge of withdrawals revealed that FTX “owed as much as $8 billion” which added to the destabilizing crash in early 2022 that “drained $1 trillion from the market.” In terms of repaying everyone’s deposits in FTX, the only certain thing is the fact that not everyone is going to get their money returned. SBF also shared the same sentiment, believing that “it would take a $8 billion injection of capital to make every depositor whole.” Ray countered that argument in his attempt to revive FTX, noting that there is a lack of documents “detailing all the company’s depositors.” Meanwhile, Robert Frenchman, a partner at New York law firm Mukasey Frenchman, stated that U.S.-based FTX customers would have to “join a queue of creditors” as there is “no special protections of customers of unregistered crypto firms like FTX.”  

SBF tried to save face by admitting on X (formerly Twitter): “I’m really sorry, again, that we ended up here” and “Hopefully this can bring some amount of transparency, trust, and governance.” Contrary to Bankman-Fried’s apologies, experts noted that FTX’s collapse was due in part to the symbiotic relationship between FTX and Alameda. The Guardian reported that FTX did not have “the ability to accept wire transfers” which made customers send money to Alameda, prompting FTX to credit their accounts. The actual money that was deposited into Alameda was never sent to FTX in the end as Alameda “had kept of, traded with, and frequently lost, $8 billion of FTX customer funds.” And so, when FTX customers tried to withdraw their money, FTX could not return all their deposits because FTX “had never taken it.” When investors questioned FTX’s operations, SBF and his associates “agreed to lie, covering up the company’s true financial state and the special arrangements for Alameda to use customers assets freely.” At the same time, FTX was also meant to fail as Ray stated that: “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.” 

As for the current state of FTX, the cryptocurrency exchange faces a variety of legal challenges such as a class action lawsuit for those who lost their deposits and two lawsuits against celebrities and influencers who had endorsed the cryptocurrency exchange. A class action lawsuit against FTX and its executives sought to “represent more than 1 million FTX customers in the U.S and abroad,” aiming to have FTX announce that “traceable customer assets are not FTX property.” SBF and FTX executives are not the only ones facing lawsuits as celebrities faced a class action in Miami, alleging that “FTX yield-bearing accounts were unregistered securities that were unlawfully sold in the U.S., which required the promoters to disclose the compensation they received.” The celebrities facing the lawsuit ranged from NFL quarterback Tom Brady, comedian Larry David, and Shark Tank’s Kevin O’Leary as they appeared in advertisements and endorsed FTX. This lawsuit argued that FTX’s customers were engaged in “buying and selling ‘unregistered securities,’ regulated by the Securities Exchange Commission (SEC)”; which requires full disclosure of the celebrities’ “financial agreements with FTX.” Plaintiffs in this lawsuit also alleged that such participating celebrities had “violated Florida securities and consumer-protection laws” by not disclosing their arrangement with FTX and “not undergoing requisite due diligence before promoting the company.” Celebrities responded by stating that they “never pitched the accounts at issue” and “did not cause the investors’ losses.” However, there is a critical lens upon them as regulators had warned the impact of such endorsements as noted in a statement in a NFT lawsuit: “Celebrities and others are using social media networks to encourage the public to purchase stocks and other investments. These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.”

Following the collapse of FTX, 2 of its executives pleaded guilty to criminal charges related to FTX’s downfall. Caroline Ellison, the CEO of Alameda Research and a former lover of SBF, had pled guilty to a total of 7 counts: conspiracy to commit wire fraud on customers of FTX, wire fraud on customers of FTX, conspiracy to commit wire fraud on lenders of Alameda Research and wire fraud on lenders of Alameda Research, conspiracy to commit commodities fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering. Furthermore, she admitted that she was not “well-suited” to run Alameda Research in an entry: “Running Alameda doesn’t feel like something I’m that comparatively advantaged at or well suited to do.” Even though Caroline was CEO of Alameda, the SEC stated that SBF remained as “the ultimate decision-maker” where he directed “investment and operational decisions.” In addition, her split from SBF and the downfall of FTX now made her critical to his upcoming trial since she is now “cooperating with federal prosecutors” to prove his role in the financial fraud. Gary Wang, a co-founder of FTX and former chief technology officer (CTO), pled guilty to 4 counts: “conspiracy to commit wire fraud on customers of FTX, wire fraud on customers of FTX, conspiracy to commit commodities fraud and conspiracy to commit securities fraud.” According to one of Wang’s attorneys, Ilan Graff, Wang has “accepted responsibility for his actions and takes seriously his obligations as a cooperating witness.” Both Ellison and Wang’s guilty pleas and cooperation with federal authorities indicate that they will testify against SBF, potentially lessening their own sentences if their assistance is “substantial” to prosecutors. 

Under the control of newly instated CEO John Ray III, an expert in recovering bankrupt companies, FTX is now also suing SBF’s parents for misusing company funds to “enrich themselves through gifts and donations.” According to the lawsuit, Barbara Fried and Joseph Bankman, 2 established Stanford Law School professors, allegedly received “millions of dollars” from FTX via gifts and donations to specific causes, prompting FTX to be seen as a “family business.” Joseph Bankman, SBF’s father, claimed that his role at FTX dealt primarily with the company’s “philanthropic wing,” contrary to the lawsuit’s statement that he was a part of SBF’s “core management team.” The lawsuit further stated that Bankman and Fried were the recipients of a “$10 million gift and a $16.4 million luxury home in the Bahamas… despite knowing or blatantly ignoring that the FTX Group was insolvent or on the brink of insolvency.” SBF’s parents were also deemed to be responsible for FTX funds to be directed towards political and charity organizations, including donations to Stanford University. Despite the funds, Bankman was reportedly unhappy with his $200,000 salary from FTX as it was “just a fifth of what he believed he would be paid” in the lawsuit—“lobb[ying] his son to massively increase his own salary.” By seizing funds from FTX, both of his parents “either knew or ignored red flags” regarding their son’s fraudulent scheme in exchange for enriching themselves at the debtors’ costs. The impact of their actions was not financially exclusive as Stanford Law had removed them from their teaching roster and recognized that SBF’s “legal bills will likely wipe them out.” 

Unlike FTX and Alameda executives, SBF’s trial is set to commence in early October this year. Contrary to everyone else, SBF pled not guilty to 7 charges of fraud, money laundering, “bribing the Chinese government and overseeing an illegal campaign finance scheme that showered tens of millions of dollars on Democratic and Republican candidates.” Around the time of FTX’s collapse, SBF doubled down on his claims that he “never knowingly commingled funds between Alameda and FTX and that he was surprised by the size of Alameda’s exposure on the FTX exchange” at a conference with the New York Times. According to CoinDesk, the Department of Justice’s charges of “committing wire fraud on FTX customers” and “committing wire fraud on Alameda Research lenders” are “substantive,” indicating that SBF was an active participant and committed these crimes. The other 5 charges are “conspiracy” charges which imply that he committed these crimes with at least another person. However, the Department of Justice (DOJ) requested Judge Lewis Kaplan to understand that “there is no need to prove that the crime or crimes… actually were committed” in terms of conspiracy charges, needing to prove “beyond a reasonable doubt” that a minimum of 2 people “agreed that they’re going to defraud people” and “overtly acted to do so.” Jordan Estes, partner at Kramer Levin, stated that the charges of fraud are “relatively similar” as it deals with SBF’s deception to customers or lenders, causing the DOJ to primarily focus on his deception rather than anything else. Estes further noted that intentionality will be a crucial aspect of the trial where if SBF’s defense team can prove his lack of intent to commit fraud, the jury may find him not guilty of the charges imposed on him. 

A potential argument for the defense is that SBF “ran his actions by his lawyers while at the exchange, and they okayed them.” Prosecutors may have to demonstrate that SBF either failed to provide the full details of FTX’s operations for them to give him proper advice “to push back against the advice-of-counsel defense.” It is also important to note that a verdict of each charge must be “unanimous,” meaning that every jury member will have to believe that SBF either did or did not commit every single charge. Each of the charges SBF faces has a 5 to 20-year maximum prison sentence, totaling 115 years in prison. This is not to say that SBF will be in prison for that as in reality, these sentences are likely to be served concurrently instead of consecutively. Martin Auerbach, an attorney at Withersworldwide, said that the judge in SBF’s case will try to “distill this down to what the alleged crime” and aim to sentence SBF for the “core wrongful conduct.” Given the severity of the collapse of FTX and SBF’s leadership, there is still a possibility in which SBF may face a long-term prison sentence as the financial losses could add to his overall sentence. However, before the judge’s actual sentencing, the U.S. Probation and Pretrial Services System will give a recommendation based on the trial transcript and SBF’s background. Several lawyers predicted that SBF will face a sentencing of 10-20 years in prison, but that depends on Judge Kaplan’s discretion as he has the final say over the consequences SBF faces. 

The rise and fall of FTX, once a cryptocurrency giant, is a cautionary tale that reverberates far beyond the realm of digital currencies. Sam Bankman-Fried, the charismatic face of the exchange, who once epitomized the promise of the crypto industry, now finds himself entangled in a web of legal troubles. The events surrounding FTX have not only shattered the trust of investors but have also cast a pall over the entire cryptocurrency landscape. The collapse of this behemoth exchange serves as a stark reminder of the need for stringent regulation and transparency in the crypto world. As FTX navigates a tumultuous legal landscape and the fallout from its downfall spreads, the crypto community and regulators alike await a resolution that could reshape the future of the industry.

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