FTX, formerly the second-largest crypto exchange in the world, recently filed for bankruptcy in one of the most devastating scandals to hit the crypto sector. Here's a breakdown of what happened to FTX and how effected investors may be able to get their cryptos back.
What is FTX?
Before the collapse, FTX was the second-largest crypto exchange in the world, trailing only Binance. FTX was supposedly the golden child of cryptocurrency exchanges in terms of legitimacy, regulation, safety and ingenuity. SBF was almost always portrayed favorably in his many interviews and other forms of media. The company had recently led a massive marketing campaign and even held the naming rights over the Miami Heats arena (FTX arena).
FTX is also closely tied to SBF’s crypto hedge fund Alameda Research. As the founder and former CEO of FTX, SBF also founded this hedge fund and continued to play a role in it until his recent resignation from both companies after the crisis was exposed.
The exact influence and relationship between FTX and Alameda Research are still unclear. What has become clear is that SBF infused Alameda with a portion of customer funds from FTX. This activity on its own is a huge red flag if not completely illegal. What is worse is that Alameda Research was not investing in typical safe investments, it seems it was spreading user funds across ultra-high-risk crypto investments that came crashing down in 2022 during the Terra Luna collapse.
What Caused its Collapse?
The roots of this crisis seem to be much older but the first major hint the public got came on November 2nd 2022. CoinDesk reported that a worrying proportion of Alameda Research's assets consisted of FTX's very own FTT token. A few days later, rumors emerged on Twitter that FTX, one of the largest crypto exchanges on earth, was insolvent. FTX’s public unraveling all started with Sam Bankman-Fried (SBF), FTX’s founder, arguing on Twitter with Changpeng Zhao (CZ), the CEO of Binance, the largest crypto exchange in the world.
The situation first appeared to be another one of the CEO’s publicity battles, as FTX was compared to the likes of Terra Luna by the rival CEO. However, the tide soon turned as improprieties emerged. Soon SBF was compared to an even more infamous scammer, Bernie Madoff.
Subsequently, CZ explained that Binance would be liquidating its large holding of FTX Token (FTT). When members from FTX said they would buy the FTT back at market value, it became clear that the exchange needed to stay at a certain price, likely above $22, for FTX to remain solvent.
Tweets from the two CEOs were posted the following day, with similar statements. It seemed as if Binance would be acquiring FTX. It became clear that there was at least some truth to the insolvency rumors. As Twitter erupted with memes of CZ conquering SBF, the crypto market took a turn for the worse. The chaos was further exacerbated when CZ tweeted that Binance had looked at FTX’s books, and it was unable to follow through with the acquisition.
The drama continued to compound as withdrawals were frozen on FTX. Users began to attack SBF on Twitter. SBF decided it a good idea to remain active on Twitter, despite the roughly $8 billion dollars of user funds that his company allegedly misused and a constant stream of insults from investors.
The loss of user funds was not the only terrible consequence of FTX’s collapse. It spread further contagion that is now being felt across the crypto industry. FTX had its tentacles in many crypto projects including Solana, which is now down over 95% this year. Other exchanges, including BlockFi, have also halted withdrawals.
Can You Reclaim Your Lost Funds?
Investors who lost funds in either FTX or FTX.US (and other exchanges and platforms like BlockFi, Voyager and other recent unsettled bankruptcies could potentially recover at least a portion of the loss. However, crypto exchanges don't have the same customer protections of a regular bank. For example, deposited funds in many crypto exchanges are not protected by the Federal Deposit Insurance Corporation (FDIC), a government agency that protects customer bank deposits up to $250,000 per regulated U.S. banking customer.
How to Try to Get Your Money Back
If you can't withdraw a significant amount of money in the FTX or FTX.US exchanges, you should strongly consider seeking legal advice. It may not be an easy process. There are 3 vital variables that will likely determine how much customers will be able to reclaim: how many assets FTX still has, how many it still owes and how exchange creditors' losses are defined. Customers may be considered as non-secured because they were never able to put up collateral against the "debt". Unfortunately for the effected customers, creditors with secured debt generally take priority in the bankruptcy process. The silver lining is that non secured creditors usually come second in the process in front of equity shareholders.
The first thing you should probably do (after seeking legal advice) If you lost money in recent unsettled bankrupt crypto exchanges or platforms like (BlockFI and Voyager) is recover as much documentation as possible on the funds including transaction history and balances. You should also keep an eye on the bankruptcy hearing for an opportunity to file your claim to try to get your money back.
Who is Sam Bankman-Fried (SBF)?
SBF is the 30-year-old MIT grad, founder and CEO of FTX. His fortune was one of the largest on earth, estimated to be worth north of $20 billion at the peak of the crypto bull run. He has since lost over 99% of his net worth following the FTX collapse. SBFadvertised himself as an altruist and was the second-largest donor to Democratic candidates this election cycle. However, Kelsey Piper, a journalist at Vox, revealed direct messages she exchanged with SBF himself admitting that his altruism was “mostly a front.”
Donations were just the tip of the iceberg when it came to SBF’s relations with politics. He has been discussing his interest in politics for years, and even mentioned his plans to enter the political arena one day. He has been one of the most influential people in the ongoing crypto regulation. Just weeks before the FTX collapse, SBF had lost much of his support from the crypto community when he advocated for strict regulation of crypto.
Based on the U.S. justice system, SBF is innocent until proven guilty. However, the best-case scenario it seems was that he was just a bad CEO. The crypto community will have to wait until a trial takes place to get definitive answers.
What’s Happening Right Now?
FTX, FTX.US and Alameda Research all filed for Chapter 11 bankruptcy, leaving much of the chaos up to the courts. Users will need to wait months, perhaps years, to see their money (if they ever do). The actions of FTX, Alameda, FTX.US and SBF will likely be investigated by several authorities. Until then, the craziness of the story grows each day. Crypto Twitter is already publicizing their votes for who should play SBF in the movie that will inevitably follow one of the greatest financial disasters of this generation.
Is Binance Buying Them Out?
Binance will not be buying FTX. Despite CZ tweeting its intention to acquire the company, he has since retracted the statement and said there is nothing that can be done. The retraction came after Binance was granted access to FTX’s internal financials. Whether CZ ever intended to acquire the company is unknown. He may have implied he would acquire FTX to speed up the demise of his competitor.
Can Crypto Exchanges Be Trusted Anymore?
Centralized crypto exchanges will be difficult to trust. They ultimately go against the ethos of cryptocurrency, which is the removal of centralized power in finance whether it be in the form of banks, governments or exchanges. While some centralized exchanges may be more trustworthy than others, the failure of FTX will be a stain on the crypto industry for years to come. If there is a positive to be taken from this event, it is that DeFi did not fail. It was the centralized crypto banks that failed, the very type of institution that crypto was designed to defeat.
How Can Investors Keep Their Crypto Safe?
Investors need to use only crypto exchanges that back funds 1:1. Much of this information is public. If you are wary of centralized exchanges, then you need to hold your own keys. This means using a non-custodial wallet to store your crypto. For this, you need a software wallet and a hardware wallet.
Best Hardware Crypto Wallet: Ledger Nano S Plus
The Ledger Nano S Plus has become the most trusted hardware wallet in the crypto industry. Ledger is the leading hardware wallet brand for a reason. Ledger wallets are all you need to keep your crypto safe. The wallets are simple, extremely secure devices that allow users to store their crypto offline. Offline storage gives users an extra layer of security against cyberattacks. Ledger supports more than 1,000 different cryptos including Bitcoin, Ethereum, Dogecoin, Ripple, Shiba Inu and all ERC-20 tokens.
Best Software Wallet: ZenGo
A software wallet is also good for interacting with decentralized exchanges and other Web3 applications. ZenGo is a popular one. Software wallets are referred to as hot wallets and should be treated in such a manner. Long-term fund storage should take place in cold storage which is your hardware wallet. Funds can be transferred from software to hardware wallet quite easily.
What Will Happen With FTX Going Forward?
The future of FTX is unclear. Most of the decisions will come down to the courts. SBF has stepped down as CEO of the company, and John Ray III has since taken over the role to lead the company through the bankruptcy process. Ray performed a similar role in the bankruptcy proceedings of another infamous company, Enron. The courts will look to minimize damage to the customers before anything else. The disaster is likely to influence a harsh set of crypto regulations by the U.S. government, which could potentially set the sector back years in advancement.
Frequently Asked Questions
Is FTX Bankrupt?
Yes. FTX, FTX US and Alameda Research all filed chapter 11 bankruptcy. John Ray III is leading FTX through its bankruptcy proceedings.
Will FTX Users Get Their Funds Back?
Unfortunately, it seems like most users will not get their funds back. However, FTX likely still has enough to make at least some users whole.
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