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FTX: The Last Domino or the First?

Sam Bankman Fried started a cryptocurrency exchange in 2019. He had made his fortune by arbitrage opportunities and had established a hedge fund. He was seen as the crypto messiah due to bail outs of Block Fi, Voyager, and other similar firms. But even Satan is said to be a former angel……


It was just a taunt by SBF to the creator of Binance in a now deleted tweet, teasing him for looking to collaborate with US regulators that started the spark which became the biggest crypto fire ever. (Most of his deleted tweets)


Just a few days after that a report by Coindesk was published that said Alameda Research, another co. of SBF held large amounts of FTX token-FTT. This was followed by a large sale of the token by Binance, which crashed the value of the token and exposed a liquidity crisis within FTX.


The irony about it was – in an interview with Forbes dated 28th June he had himself warned about crypto exchanges being secretly insolvent.


The Technical Side

In the above mentioned Coindesk report it was revealed that out of the 14.6Bn dollar of Alameda assets, 3.66Bn were ‘unlocked FTT tokens’ and 2.16Bn were ‘FTT collateral’. Even more crypto currency was held in the form of 292 million of ‘unlocked SOL’ and $863 million of ‘locked SOL’.


This extremely large holding of volatile and potentially worthless assets was even more worrying in the backdrop of 7.4Bn of loans that they had taken. All this should have caused a panic sale of FTT but retail investors were too sure that the 4th largest exchange by volume couldn’t do such a thing as their favourite celebrities – Tom Brady, Shaq, etc has openly endorsed the founder of FTX. This was of course until Binance announced a 2.1Bn sale on the 6th of November which caused a 30% price crash.

The CEOs of both the exchanges had a huge back and forth after this about business ethics and how to ethically compete even saying at one point they wouldn’t support the other under any circumstances.


A day after claiming that they had no liquidity issues, FTX temporarily froze withdrawals on November 8th causing further suspicion as to their financial position.

Mere hours after this incident binance CEO announced that they have signed a non binding letter of intent with FTX to buy them out and solve the liquidity crunch.

Was this a classic enemy turned lovers saga? Had they found it to support each other in the best interests of the investors? NOPE, the LOI never materialized as the next day Binance pulled out stating FTX had mishandled large amounts of customer funds and it was not to stoke further panic but due to ‘corporate due diligence’. This was a cut-throat business strategy by the Binance leader that further plummeted FTX into insolvency hell. Investors pulled out an eye watering 5Bn dollars from the token.


Reports that followed revealed everything from inappropriate workplace relationships, to a 10bn line of credit to Alameda research, to 1 – 2 Bn UNACCOUNTED user funds – basically saying the money vanished. FTX was then hacked and another 400-600 million vanished.


The legal side

The fake promises and malicious mismanagement of FTX fortified in the form of a chapter 11 bankruptcy or “reorganisation” filed on 11th November. Along with 20 FTX sister or daughter companies too filing bankruptcy petitions. Anyone else smelling shell companies?

Even the celebrities that only promoted the platform have been named in a class action lawsuit regarding owed money to the investors.

On November 18 the authorities in Bahamas took control of FTX assets and SBF was arrested on December 12.

Fast forward 10 days and he was then released on a 250 million bond, the LARGEST EVER in the history of US federal courts.


The aforementioned begs the question what was he charged with?

Well the list is long :-

Wire Fraud

Unfair Trade Practices

Civil Conspiracy

Illegal Campaign Contributions

Securities Fraud

Commodities Fraud

Money Laudering

and much, much more.


Civil charges have been filed by the US Securities and Exchange Commission , the US Commodities Futures Trading Commission and the US Department of Justice has filed a criminal charge. The links of their respective filings have been embedded.


What does this imply?


The courts will have to rule whether to treat cryptocurrency as an investment of a commodity. This will be landmark judgement as the US sets precedent regarding crypto and other governments will likely walk in the court’s footsteps.

Another problem is that bankruptcy courts do not have much experience when it comes to bankruptcies of companies like these. The road to unfreeze the funds and recovery to investors will be a long and tumultuous one.

The saving grace :

SBF can face large fines and upto 25 years in jail accompanied with restriction to promote or manage any future firms and trade in securities,

Bank accounts worth 100 million, 50 million and 26 million have been discovered and frozen, and securities in the form of Robinhood shares worth 526 million have also been frozen and,

His closest business partners have admitted to many of the above mentioned charges and are co-operating with the authorities.

How to safeguard against future FTXs?


The desperation in the buyout of FTX by SBF to the point that he was willing to be acquired by Binance shows how low the evil can stoop. This paired with the fact that the number 1 buying out the number 2 biggest crypto exchange by value demonstrates a clear fundamental problem – crypto promises to be decentralized yet there is concentration of funds being traded on a handful of platforms.


The web of SBF and their layers deep subsidiaries also should have made the public wary as to how tangled the corporate structure really is and now a collapse of one of his bigger holdings can set up the game of insolvency dominoes.




Basic questions like :-

How much experience does SBF have?

How much can I trust someone who dosen’t even dress up for meetings?

How can he speak about playing video games on business calls with pride?

Why is their Chief Regulatory Officer accused of fraud and that too on a poker site?!!

All this and heaps of more evidence should have rung some bells in our minds but it didn’t.

The only takeaway is that no one can do due diligence on our behalf and the management of any company isn’t a benevolent altruistic group looking to serve the public. They are there to protect their own money, as should you.

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