Although Bankman-Fried was an American, he built the company in the Bahamas. But there is a reason for that! The company’s foundation for success was made out of risky and sketchy trading that was illegal in the United States.
Just after FTX was launched in 2019, the cryptocurrency market exploded. In December 2019, the price of 1 Bitcoin was around $7000, and then the value of Bitcoin skyrocketed above the $64.000 mark in November 2021. But this didn’t last long. On the contrary! Soon after it saw its peak, bitcoin was again trading at $16.000, and as a result, a large number of platforms were being forced to shut down.
However, while the rest of the crypto industry was struggling, FTX seemed unfazed. Actually, they were still going strong, even acquiring some of its struggling competitors.
One token: FTT. It turns out that FTX issued a share in itself, FTT, with the promise to buy it back with a fraction of its profits. However, CoinDesk was able to get its hands on some leaked documents that implied Alameda, FTX’s hedge fund, was using FTT for risky loans. What does that mean? Essentially, FTX was trading with company stock.
This was the beginning of the end for Bankman-Fried and FTX! After this discovery was made public, its major competitor and a large FTT shareholder, Binance, announced that it was selling its assets. This caused other investors and users of the platform to withdraw their money.
In reality, FTX’s downfall was due to its connection to Alameda Research. This was, surprisingly, a company created by Bankman-Fried 2 years before the birth of FTX. It was a cryptocurrency trading firm that ended up having very close ties with its sister company. Since FTX was unable to accept wire transfers, customers would send money to Alameda, and their accounts would be credited by FTX. However, the money was never actually transferred.
In fact, during a period of three years, Alameda had kept, traded with, and even lost $8 billion of FTX customer funds. So when everyone decided to withdraw their funds, FTX could not give their money back because the company had never actually received it.
However, ultimately, FTX collapsed because the cryptocurrency trading company was a shambles. In fact, the new FTX CEO, John Ray, referred to the company’s mismanagement and lack of financial transparency as “unprecedented”.
The same day that Sam Bankman-Fried stepped down from the helm of FTX, the company’s new CEO filled the bankruptcy documents, stating that billions of dollars have been lost, and much of it will never be recovered. The company’s leaked balance sheet was circulating everywhere, showing $8.9 billion in liabilities and only a little above $1 billion in liquid assets. So we can imagine that detangling the financials of the company was a real struggle for the new CEO, John Ray.
And if that was not enough, the following day, on 12 November 2022 the company was allegedly hacked and almost half a million dollars were drained from user accounts. The company moved all its assets into cold storage for protection and John Ray III, a well-known attorney and experienced executive who got experience in overseeing enterprise bankruptcy, was in for a hard time.
However, his work was not left uncompensated. The well-known attorney charged FTX with almost 700.000 dollars for his work in the company from 11 November to the end of December, stating that he had worked 75 hours a week during the period, at an hourly charge of $1300. What can we say, at least someone got compensation because large amounts of victims of the event didn’t.
And if you think that Sam Bankman-Fried would be in jail by now for such a big fraud, think again. He is in home arrest right now after one of the biggest bailouts in the history of the US, at $250 million.
This whole story is just another example of just how fraudulent and problematic some crypto projects can get. Due to the lack of regulations and close supervision, huge sums of money are at risk of just disappearing overnight. This tragedy came just a few weeks after the Luna crypto network crash made around $60 billion disappear from the digital currency environment.
