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The Downfall of FTX and billionaire Sam Bankman-Fried

November 11th, the cryptocurrency exchange FTX filed for bankruptcy and its chief executive, Sam Bankman-Fried, resigned, a downfall that has stunned crypto insiders and sent shock waves through the industry.

The collapse capped days of whiplash for FTX after its rival and the world’s largest crypto exchange, Binance, pulled out of a deal to acquire the company.

On Thursday, FTX’s new chief executive, John Jay Ray III, said in a bankruptcy filing that he had never seen “such a complete failure of corporate control.” Mr. Ray had helped manage the aftermath of some of the largest corporate collapses in history, including the implosion of Enron in 2001.

FTX is one of the world’s largest cryptocurrency exchanges. It enables customers to trade digital currencies for other digital currencies or traditional money, and vice versa. It is based in the Bahamas and was run by Mr. Bankman-Fried. It has spent millions of dollars lobbying U.S. legislators to institute crypto-friendly regulation.

The company had built its business on risky trading options that are not legal in the United States. The crypto industry overall has increasingly been the target of regulatory scrutiny on Capitol Hill and across the globe.

The bankruptcy filing on Thursday by Mr. Ray, the new FTX chief, described numerous corporate missteps, including the use of software to “conceal the misuse of customer funds.” Mr. Ray also said in the filing that he could not trust that financial statements assembled under Mr. Bankman-Fried’s leadership were accurate.

The savings of hundreds of thousands of customers who deposited their holdings on the FTX platform are in jeopardy. So far Mr. Ray’s team has secured about $740 million worth of cryptocurrency belonging to parts of FTX’s business, a sum he called “only a fraction” of what he was hoping to recover.

Traders use FTT for operations like paying transaction fees. Last year, Changpeng Zhao, the chief executive of Binance, sold his stake in FTX back to Mr. Bankman-Fried, who paid for it partially with FTT tokens.

On Nov. 2, the crypto publication CoinDesk reported on a leaked document that appeared to show that Alameda Research, the hedge fund run by Mr. Bankman-Fried, held an unusually large amount of FTT tokens. Alameda’s need for funds to run its trading business was a big reason Mr. Bankman-Fried created FTX in 2019. But the way the two entities were set up meant that trouble in one unit shook up the other as crypto prices began to drop in the spring.

Binance announced on Nov. 6 that it would sell its FTT tokens “due to recent revelations.” In response, FTT’s price plummeted and traders rushed to pull out of FTX, fearful that it would be yet another fallen crypto company.

FTX scrambled to process requests for withdrawals, which amounted to an estimated $6 billion over three days. It seemed to enter a liquidity crunch, meaning it lacked the money to fulfill requests.

 

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