The second week of November 2022 had the crypto industry in a state after the dissolution of FTX and the company announcing its bankruptcy. FTX is incorporated in Antigua and Barbuda and headquartered in The Bahamas. This Bahamian cryptocurrency exchange was founded in 2019 by Sam Bankman-Fried, with over a million active users in February 2022. It was built by traders for everyone to buy and sell Bitcoin, Ethereum, USDT, FTT, and other popular digital products with low fees. In addition to this, FTX also had FTX.US, a separate division and crypto exchange established to operate exclusively for United States residents. The company was not just a crypto exchange but functioned as a cryptocurrency with a native coin (FTT), a “hen popular crypto token with over 30,000 investors holding the token. For a relatively new coin, its value inclined to a market cap of over $3,000,000,000, proving itself as a valuable token for users worldwide.
What actually happened with FTX?
FTX was one of the world’s leading crypto exchange platforms, with assets valued between $10-50 billion and a listing of more than 130 affiliated companies across the globe. Everything went downhill after it was found that the company was in debt and had loans worth $7.4 billion, constituting most of the company’s liabilities. Problems that led to the dissolution arose during the second week of November when CoinDesk, the leading digital media, events, and information services company for the crypto asset and blockchain technology community, reported that FTX's FTT token made up a majority of Alameda Research's (FTX's sister company and Bankman-Fried's trading firm) balance sheet. FTX’s financial documents were leaked to Coindesk, which then reported that FTX violated its own terms of service that prevented the company from using customer assets by actually misusing user funds. A leaked balance sheet gave evidence of the misuse of users' funds. It indicated that by the 30th of June 2022, Alameda had $14.6 billion in assets and $8 billion of liabilities on its balance sheet. Of these assets, $3.66 billion were "unlocked" FTT tokens, of which $2.16 billion were listed as "FTT collateral" and $3.37 billion in "crypto held." Along with $2 billion in equity securities, $863 million "locked" SOL, the native token of the Solana blockchain, $292 million "unlocked" SOL and $41 million in SOL collateral. It was further reported that there was approximately $292 million worth of "locked" FTT and $7.4 billion in loans, which comprised most of the trading firm's liabilities.
To justify the above and somewhat come to their rescue, the CEO of Alameda research, Caroline Ellison, went on Twitter where she stated that "that specific balance sheet is for a subset of our corporate entities" and that Alameda has more than $10 billion in assets that aren't reflected on the leaked documents. She further exclaimed that the company had "returned most of its loans by now" adding more evidence to the alleged reports that it had financial crises and used investor funds as collateral to attain loans and keep the company afloat.
After all of the above irregularities were mentioned, many FTX users and investors rushed to withdraw their investments. More than $1.2 billion was withdrawn from the exchange by users on the 7th of November 2022. This led to the market price value of Bitcoin plummeting below $20,000 for the first time since late October 2022, leading to the market price of other cryptocurrencies declining even lower over consecutive days due to negative sentiment now associated with crypto after this incident. The large withdrawal of funds by users led to the company's demise, leading it into bankruptcy.
By Tuesday, the 8th of November, Changpeng Zhao, the CEO of Binance (the world’s largest Bitcoin and Altcoin crypto exchange by volume), tweeted that “this afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a nonbinding LOI (letter of intent), intending to fully acquire FTX.com and help cover the liquidity crunch." However, the deal fell through. By Wednesday, it was reported that Binance would not complete its proposed takeover of FTX after reviewing the cryptocurrency exchange's internal data and loan commitments. "Our hope was to be able to support FTX's customers to provide liquidity, but the issues are beyond our control or ability to help," said the crypto exchange to the Wall Street Journal.
Companies pulling out of FTX
As mentioned above, over 130 companies are affiliated with FTX. However, after the financial crisis scandal, a number of those companies withdrew their partnerships with the crypto exchange. Some of these companies include:
1. Mercedes
Mercedes' formula one cars will no longer carry the logos of cryptocurrency brand FTX after the team suspended their sponsorship deal.
2. Miami Heat
The NBA's Miami Heat and Miami-Dade County decided to terminate their relationship with FTX and will rename the team's arena.
Bitcode Method official, a crypto news authority site, mentions the comprehensive list of companies affiliated with FTX, including Visa, which expanded its partnership with the bankrupt company in early October 2022. We are yet to report if more companies will dissolve their partnerships with FTX.
The dissolution of FTX left the crypto industry in a daze, with many investors anxious, increasing the negative public sentiment surrounding crypto. However, the financial crisis and scandal surrounding it does not and should not speak for the crypto industry as a whole. The digital asset industry is still a modern concept, with various laws still being established to regulate the functionality of the industry. Most importantly, the crypto industry has steadily been reforming the negative public sentiment surrounding it, looking at its core functions, technologies and innovations that have been launched and are now being integrated and adopted by various industries, including centralised, traditional institutions. Every innovation and application of a new concept is bound to have hurdles. Crypto has proven itself to be an essential and global transformative concept. It would be unfair and illogical to cancel an entire functional industry based on one company without considering all factors involved.
