It is estimated that more than 10 lakh people were unable to withdraw funds when FTX, the world's second largest cryptocurrency exchange, declared bankruptcy.
An MIT alumnus in his thirties who went from millionaire to bankrupt, a warning from the White House, and thousands of clients whose funds were frozen - this is the story. The bitcoin market has seen one of its most spectacular weeks in recent memory. The occurrences may lead to more stringent rules for a sector that has been accused of being irresponsible with consumers' money.
Let's catch up: what occurred last week?
Approximately 10 lakh customers of FTX, the world's second largest crypto exchange (used to buy and sell cryptocurrencies like Bitcoin), were unable to withdraw their monies after the company declared bankruptcy. Just as when your stock broker tells you at the last minute that you can't liquidate your holdings or withdraw your money, this is a similar situation. Investor confidence was understandably shaken by the FTX collapse, and a new selloff in cryptocurrencies ensued; Bitcoin, which is already down over 70% this past year, fell another 12% in only five days.
It also sparked new worries about the security of customers' assets on cryptocurrency exchanges, which lack the same gatekeeping systems as traditional financial institutions like banks. "The administration has repeatedly stated that, without adequate control of cryptocurrencies, they risk hurting regular Americans," White House Press Secretary Karine Jean-Pierre said in a recent briefing.
Many have called this "the Lehman Brothers moment for the crypto business," alluding to the collapse of the investment bank that triggered the 2008 financial crisis.
When and why did FTX fail?
This is where the complication arises. Sam Bankman Fried, better known by his initials SBM, created both FTX and Alameda Research, a trading business. Coindesk, a cryptocurrency news website, and The Wall Street Journal both published articles that implied a connection between the two companies despite their separate identities.
According to WSJ, the exchange FTX loaned Alameda money from consumer deposits. According to Coindesk, the majority of Alameda's wealth is held in the form of FTT, a cryptocurrency generated by FTX and which it could, in theory, continue to produce forever.
Binance, the biggest cryptocurrency exchange and led by Changpeng Zhao, announced its intention to sell all of its FTT tokens "due to recent disclosures" after the Coindesk investigation. As a result, investors panicked and sold out their tokens, sending their value plummeting by 78% in only 24 hours.
However, FTX was unable to sustain the influx of $6 billion in withdrawal requests over the course of three days, and the company temporarily suspended withdrawals.
Then what occurred?
Binance announced on November 8 that it will purchase FTX to save the failing exchange. At the same time, SBM stated that the agreement will safeguard clients and restore access to their money. However, that optimism was short-lived, as Binance said the next day that it would no longer purchase FTX "as a consequence of corporate due diligence."
Coincidentally, Zhao and SBM have been competitors for a long time, and many believe Binance's statement that it will begin trading FTT tokens ultimately doomed SBM.
Finally, what became of SBM?
SBM told Reuters that he was still in the Bahamas, where FTX is located, despite widespread speculation that he had fled to Argentina. It's also the home of the people closest to him. Coindesk cited an insider who was aware with the firm as stating, "The entire organisation was controlled by a gang of adolescents in the Bahamas." According to the study, most of the dozen or so main characters are now or have recently been involved in love relationships.
Didn't SBM have some kind of fame as well?
The 30 year old has built a public persona as a selfless millionaire by enlisting the help of prominent YouTubers to spread this message. Supermodel Gisele Bündchen, NFL star Tom Brady, and Seinfeld creator Larry David were just a few of the famous people that promoted FTX in their advertising blitzes. The Financial Times said that SBM was the greatest corporate contributor to the Democratic Party, second only to George Soros. The company's name was featured on a basketball stadium, and it sponsored Formula One teams.
What kind of effects does this scandal have on the crypto market as a whole?
Investor confidence in India and elsewhere has been shaken by the actions of at least three cryptocurrency exchanges this year alone: Vauld, FTX, and BlockFi.
When news broke that FTX had filed for bankruptcy, cryptocurrency exchanges in India hurried to reassure customers that their assets were secure. As CoinSwitchKuber co-founder Ashish Singhal tweeted: "holds user assets 1:1. All of your cryptocurrency holdings and deposited funds will be held in your name. In other words, we don't reinvest or recycle them. You can get to them whenever you like.
The CEO of CoinDCX, Sumit Gupta, lamented on Twitter, "What happened with FTX is very unfortunate!" The security of our users and the welfare of our investors have always been our top priorities here at @CoinDCX. He also said they "do not have a native token" and "never expose user funds to price and credit risk."
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