The rise of crypto exchange FTX is phenomenal. In less than three years, the company reached a valuation of $32 billion and held billions in assets on behalf of its clients. A week ago, the FTX group collapsed like a house of cards and filed for bankruptcy.
How could this happen? The most important questions and answers.
What is FTX?
FTX is a trading platform that allows users to trade cryptocurrencies such as bitcoin and ether, as well as much more complex financial products. Founded in May 2019 by two MIT graduates, Sam Bankman-Fried and Gary Wang, the company already had one million customers by February 2022. In particular, Bankman-Fried, who appears online with his initials SBF, quickly rose to crypto guru status. FTX is used not only by private investors, but also by hedge funds and other professional players.
What is Alameda Research about?
Prior to FTX, Bankman-Fried founded Alameda Research in October 2017 to take advantage of price differentials in crypto trading between Asia and the US. These arbitrage deals grew in size. Therefore, “SBF” decided to create its own trading platform with FTX. The connection between FTX and Alameda is opaque in detail and is said to have contributed significantly to the FTX crash.
Why is FTX broken?
On the one hand, it is suspected that FTX would have embezzled $10 billion of customer money. Much of it would have flowed to Alameda. The company would have made risky financial bets. The FTX Group’s liquidity crisis was exacerbated by the depreciation of its own cryptocurrency FTT, which made up a significant portion of deposits.
What role did Binance and Changpeng “CZ” Zhao play in this?
Binance is the world’s largest crypto exchange and a competitor to FTX. However, in the founding phase of FTX 2019, Binance boss Changpeng Zhao still acted as promoter and investor of FTX. But with the rise of FTX, the relationship between the two crypto stars “SBF” and “CZ” also cooled. Binance returned its FTX stake in Summer 2021 for the equivalent of approximately $2 billion and also received over $500 million in FTT coins as part of the deal. When Binance announced it was divesting its FTT holdings just over a week ago, the local FTX currency came under severe pressure. Moments later, FTX filed for bankruptcy and Sam Bankman-Fried resigned as CEO of FTX.
But didn’t “CZ” save FTX from bankruptcy?
In any case, on Twitter, Binance promised a rescue of FTX. But the takeover was called off after just one day. “The issues are beyond our ability to help,” it said in a sarcastic tone in a tweet. Many observers believe there was a master plan by “CZ” to hasten his demise. Binance CEO Changpeng Zhao has firmly denied this.
Should FTX customers fear for their money?
Yes, it is possible that they will lose all deposits. The extent of the damage depends on what is left. Investors are also concerned about reports that not all remaining deposits have been secured following the bankruptcy filing. The company’s chief legal officer, Ryne Miller, said FTX is investigating “anomalies in portfolio movements associated with the consolidation of FTX balances across exchanges.”
What do authorities do?
FTX and Bankman-Fried are overseen by financial regulators and law enforcement in several countries. The matter is complicated because the FTX Group has a subsidiary in the US, but the group is based in Antigua and Barbuda and is headquartered in the Bahamas. The Royal Bahamas Police said financial investigators are working with the Bahamas Securities Commission to investigate possible criminal conduct. Bankman-Fried is reportedly still in the Bahamas.
What are the implications for cryptocurrencies like Bitcoin?
The events surrounding FTX are a shock to the crypto market. While investors are accustomed to all sorts of scandals, the FTX crash hit the market at a delicate stage: interest rates have been rising globally for some time as central banks take action to combat high inflation. Some central banks are also starting to withdraw money created during the crisis from the markets. Rising interest rates and declining liquidity are particularly damaging to risky financial assets, including digital currencies. Accordingly, Bitcoin, Ether and other crypto assets have come under further pressure from the FTX crisis. Bitcoin alone has recently lost nearly a quarter of its value to about $16,000. At the beginning of the week he was able to recover a bit.
How could FTX’s bankruptcy affect crypto regulation?
In short, every financial scandal calls for more regulation. Authorities such as the German Bafin and the major central banks have been arguing for this for a long time. For example, the head of the Japanese central bank, Haruhiko Kuroda, spoke out on Monday for stricter regulations. However, the road to it is rocky, as a study by the International Monetary Fund (IMF) shows: according to this, the crypto industry is not only a particularly fast-developing area. The data situation for strict regulation is also patchy, the relevant market participants are extraordinarily numerous, write the IMF’s Aditya Narain and Marina Moretti. National efforts are also very different, and global crypto regulation is correspondingly fragmented.
Source: Krone
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
