Amin Hosseini is an IPilogue Writer and an LLM Candidate at Osgoode Hall Law School.
On Friday, November 11, 2022, FTX filed for bankruptcy. Shortly after that, BlockFi filed for bankruptcy, and a Japanese exchange called Bitfront shut down. FTX is a global, centralized cryptocurrency exchange based in the Bahamas. It enables customers to exchange their digital currencies for other digital currencies or regular money. Sam Bankman-Fried (“SBF”) was the CEO of FTX.
The collapse came when Binance backed out of a deal to buy FTX. Binance is the cryptocurrency exchange with the highest daily trading volume of cryptocurrencies globally. On November 9, Binance declared it would no longer purchase FTX, mentioning reports of mishandled funds and regulatory investigations. Since then, the price of FTX tokens (FTT) has plunged by more than 90%. The FTX’s native token is called FTT. It is generally used as collateral for future positions and to lower trading fees.
According to a report by CoinDesk, on November 2, Alameda Research (“Alameda”), the cryptocurrency trading firm led by SBF, was found to have an unusually high stockpile of FTT. FTX and Alameda’s connections may have been more complex than had been previously disclosed, raising the question of whether FTX moved customers’ assets to Alameda. Since Alameda and FTX owned most of the FTTs, the other business would suffer severe financial consequences if one of them is compelled to sell or transfer its FTT holdings.
On November 6, Binance declared that it would sell its FTT tokens. The value of FTT fell, triggering investors to race to sell their holdings in FTX out of concern that it would collapse like other cryptocurrency corporations. FTX rushed to execute withdrawal requests, but could not pay. As a consequence, FTX filed for bankruptcy.
John J. Ray, the new CEO of FTX, believes such a disaster is due to a lack of supervision and poor record-keeping. He described numerous mismanagements leading to the disaster, including concealing misuse of customers’ funds through software, using unprotected group emails, and communicating using applications with auto-delete features that restrict access to FTX records.
Platform customers, unsecured creditors, must wait in line to receive whatever assets the court may take from FTX based on priorities established by equitable principles. The bankruptcy has highlighted an $8 billion shortfall. After the fall of FTX, it will be more difficult for crypto exchanges to gain trust.
Industry experts are now predicting a “crypto winter“. The cryptocurrency market has long battled to win over investors and authorities. Investor trust in digital assets has weakened in the fallout of FTX, which will likely lengthen the impending crypto winter.
The FTX collapse underscores the lack of investor fund regulation in cryptocurrency markets. The cryptocurrency industry requires more stringent regulation to be rid the market of manipulation, fraud, mismanagement, cyber security risks, and money laundering. What steps will be taken to address these concerns will remain to be seen.