FTX Trading meltdown: What you should know

Crypto exchange FTX files for bankruptcy

One of the world's leading cryptocurrency exchanges crashed and burned in spectacular fashion this week as FTX Trading filed for Chapter 11 bankruptcy protection.

Until recently FTX was a darling of the crypto world — a startup founded by two Massachusetts Institute of Technology graduates who set their sights on building a company that lets users buy and sell bitcoin and other digital currencies. But after a meteoric three-year rise that turned one of its founders and former CEO, Sam Bankman-Fried, into a multi-billionaire, FTX suddenly unraveled.

The collapse is rocking the fledgling crypto industry and digital currencies themselves, which have long been shadowed by questions regarding their value and safety as investments. Here's what's going on.

What is FTX?

FTX Trading is a Bahamas-based company that runs cryptocurrency exchange FTX. Sam Bankman-Fried and Gary Wang founded the company in 2019 and built it into the third-largest crypto platform by trade volume. In its early stages, FTX raised a total of nearly $2 billion in venture capital from a range of investors, including blue-chip venture capital firm such as Sequoia Capital, wealth management giant BlackRock and even the Ontario Teachers' Pension Plan, according to PitchBook.

Investors use FTX to purchase, store and trade hundreds of different cryptocurrencies, including bitcoin, ether, solana, litecoin, ripple and dogecoin. About $840 million worth of crypto assets are exchanged on its platform daily, according to CoinMarketCap. 

FTX raised its profile in recent years with splashy Super Bowl ads featuring quarterback Tom Brady and comedian Larry David. Its list of celebrity shareholders include NBA player Stephen Curry, Brady's ex-wife Gisele Bündchen, tennis star Naomi Osaka and Shark Tank's Kevin O'Leary. 

What led to FTX declaring bankruptcy?

By the end of 2021 FTX had annual revenue of $1 billion, but it faltered this year amid a steep downturn in cryptocurrency prices. In a matter of weeks, FTX found itself billions of dollars in debt after a series of miscalculations and investments that didn't pan out. 

Bankman-Fried said in a tweet this week he had mistakenly believed the company had enough cash on hand to pay 24 times the amount of money users typically withdraw in a day; in fact, FTX only has enough cash to pay 0.8 times the amount — a dangerously thin capital cushion.

The miscalculation proved devastating this past weekend when FTX experienced crypto's version of a bank run. Users withdrew about $5 billion in a single day amid rising concerns about FTX's solvency. Days later, Bankman-Fried told investors the company needed about $8 billion available in case customers wanted to liquidate the rest of their crypto holdings. 

"I'm really sorry, again, that we ended up here," Bankman-Fried tweeted on Friday. 

FTX has been searching for ways to cover that $8 billion shortfall, but Friday's bankruptcy filing shows that no white knight materialized. The crypto world initially thought Binance would save the day, but its CEO, Changpeng Zhao, walked away from a deal this week, citing FTX's liquidity problems. 

FTX now says that declaring bankruptcy will allow the company "to assess its situation and develop a process to maximize recoveries for stakeholders." Given FTX's financial shortfall, however, it remains unclear how much investors who lost funds will be able to recoup.

Why are regulators investigating?

Both the Securities and Exchange Commission and the Department of Justice are investigating FTX for possible violations, The Associated Press reported. Regulators are trying to determine if employees at FTX's trading arm, called Alameda Research, used customer funds to make risky trades. 

Such risks are rife in the crypto industry, which remains unregulated in the U.S. and in many markets around the world. Highlighting its perilous position, FTX on Thursday posted this stark warning on its website."

"Trading may be halted on FTX US in a few days. Please close down any positions you want to close down."

Securities regulators in Australia, Japan and the Bahamas have also launched inquiries into FTX. The Securities Commission of The Bahamas, where FTX is based, froze the company's assets on Thursday and appointed a firm to liquidate its holdings there.

"The Commission is aware of public statements suggesting that clients' assets were mishandled, mismanaged or transferred to Alameda Research," the agency said in a statement on Thursday. "Based on the Commission's information, any such actions would have been contrary to normal governance, without client consent and potentially unlawful."

Who is Sam Bankman-Fried?

Bankman-Fried is one of the two founders of FTX and was its chief executive and public face until his resignation on Friday. The son of two Stanford University law professors, he graduated from MIT with a physics degree and later moved to Hong Kong to start Alameda. 

Bankman-Fried then moved to the Bahamas, where he founded FTX in 2019, just as cryptocurrencies were starting to gain mainstream attention among average investors. After buying an array of tokens a few years ago, while crypto prices were still low, Bankman-Fried eventually saw his personal wealth balloon to as much as $26.5 billion, according to Forbes. 

Widely known as a vegan who loves playing video game League of Legends, Bankman-Fried also acquired a reputation for bailing out struggling crypto companies, earning him the moniker of "crypto savior." 

FTX's bankruptcy filing may halt Bankman-Fried's penchant for philanthropy — at least for now. The value of his 70% ownership in FTX's U.S. operations and his equity in Robinhood Markets, which were tied up in Alameda, have plummeted to $0, according to BNN Bloomberg.

What happens next?

Filing Chapter 11 suggests FTX plans to reorganize under court supervision and eventually emerge from bankruptcy. Until then, FTX employees will stay on the company and help the new CEO navigate bankruptcy proceedings, according to a statement

FTX's creditors will cue up in bankruptcy court to recoup some of their money. A bankruptcy judge and trustee will sort out which of FTX's assets can be liquidated and then divvy up the proceeds.  

The FTX bankruptcy could also add momentum in Washington for lawmakers to pass cryptocurrency rules. Murmurs of it have already begun with Congresswoman Maxine Waters, D.-California, calling for oversight and SEC Chair Gary Gensler telling CNBC on Thursday that he thinks investors need better financial protection in the crypto space. 

"The recent fall of FTX.com — a major international cryptocurrency trading platform  — is just the latest example in a string of incidents involving the collapse of cryptocurrency companies and the impacts these failures have on consumers and investors," Waters said in a statement this week. 

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