12 April, 2024



All You Need To Know About FTX Scam

31 Mar, 2024

30 Mar, 2024

FTX, formerly celebrated as the third-largest cryptocurrency exchange platform with a valuation in the billions, experienced a sudden crash overnight, sending ripples of shock throughout the crypto industry. The crash was caused by the revelation of the truth behind the operations of the crypto exchange. In this article, we will explore the details of the FTX scandal.

Growth of FTX

FTX, founded by Sam Bankman Fried and Gary Wang in May 2019, experienced rapid growth because of strategic investments and acquisitions. Notably, the $100 million investment from Changpeng Zhao, the founder of Binance, who acquired a 20% stake in the company shortly after its inception, laid the foundation for its subsequent meteoric rise in the industry.

In August 2020, FTX strengthened its ecosystem by acquiring Blockfolio, a leading cryptocurrency portfolio tracking app, for $150 million. As the cryptocurrency market surged in early 2021, FTX successfully secured $900 million from over 60 investors, valuing the company at $18 billion. This financial momentum enabled further expansion, including the acquisition of LedgerX for nearly $300 million in August 2021.

Additionally, FTX invested heavily in branding initiatives, forging partnerships with celebrity figures such as Tom Brady and Larry David. Furthermore, Sam Bankman-Fried bought out Changpeng Zhao’s stake in the company for $2 billion. By 2022, FTX emerged as a key player in the crypto exchange landscape and solidified its position as one of the largest cryptocurrency exchange platforms. The platform was valued at $32 billion following a successful $2 billion venture funding round. 

Alameda Research 

In 2017, Sam Bankman discovered a significant difference of more than 60% between the prices listed for Bitcoin on various platforms. He decided to capitalize on this opportunity by purchasing Bitcoin from an exchange, selling it on another exchange platform, and earning profit based on the price difference.  

For this reason, he set up a trading firm called Alameda Research. The firm reaped significant profits by exploiting the price difference between Asian markets and other parts of the world. The huge success of this venture allowed Bankman Fried to launch the crypto trading platform FTX. 

The Collapse of FTX

Alameda Research, the sister company of FTX,  borrowed heavily to invest in ventures. Once the lenders demanded repayment, Alameda couldn’t repay it as the funds had already been invested. To cover these obligations and to continue investing in the ventures, the firm borrowed from FTX. To facilitate these loans, FTX lent customer assets without consent and issued its own token, FTT, as collateral.

On November 2, 2022, the balance sheet of Alameda Research, which primarily consisted of FTT tokens, was published. Furthermore, FTX’s balance sheet was also leaked, which highlighted a lack of diversification and pointed out the close association between FTX and Alameda. The balance sheet revealed $9 billion in liabilities and a negative $8 billion balance. Due to FTX being a private company, its balance sheets, income statements, and cash flow statements were never audited. This allowed Sam Bankman to scam investors with assets that significantly deviated from their actual financial standing.  

After verifying the news, Binance initiated the sales of all its FTT tokens, which was approximately 23 million, causing the price of the token to drop and prompting customers to take money from the FTX platform en masse. The substantial outflow of funds led to billions in losses for FTX, forcing Sam Bankman to sell Alameda Research to raise the liquidity needed for the withdrawals. Amidst the liquidity crisis, Sam Bankman asked for help from Binance’s Changpeng Zhao and other venture capitalists. 

On November 8, Binance agreed to provide a load and buy FTX non-U.S. business but retreated the very next day from the acquisition after conducting a thorough analysis of the state of FTX. As the news of mishandling customer funds spread, the situation worsened, and more customers began withdrawing funds. 

By November 10, all of FTX’s assets were frozen by the Bahamas securities regulator upon hearing about the capital required to stabilize the exchange. Sam Bankman, on X, apologized for the liquidity crisis and admitted FTX had insufficient funds to meet customer demands. 

Subsequently, on November 11, FTX declared bankruptcy and filed for Chapter 11 bankruptcy protection. Sam Bankman Fried stepped down as CEO, and the position was replaced by a court-appointed CEO, John Ray, who is familiar with the restructuring. In a subsequent development, on November 16, celebrities and athletes filed a class action lawsuit against FTX for fraudulent activities with the Florida federal court. A month later, on December 12, Sam Bankman Fried was arrested by the Bahamian authorities and was extradited to the U.S. on December 21. 

What Happened to Sam Bankman After Getting Arrested?

On December 13, the Department of Justice (DOJ) charged Sam Bankman with eight criminal counts, including money laundering, wire and securities fraud, unlawful campaign finance contributions, and more. Later, on December 22, Bankman was granted release under house arrest after posting a $250 million bond. 

On January 3, 2023, Sam Bankman pled not guilty to all criminal charges, and the judge postponed the trial until October. The legal proceeding changed for the worse on July 26, when the judge imposed a gag order on Sam Bankman following his attempts to discredit his former business partner, who is set to testify as a witness in the trial. The situation worsened on August 11 when the judge revoked Sam Bankman’s bail for alleged witness tampering, and he was transferred back to prison on August 14. 

On November 2, Sam Bankman Fried was found guilty on all counts. Furthermore, on January 31, 2024, FTX announced plans to liquidate all assets and return the money to the investors and creditors. The reimbursement was based on prices when the FTX exchange collapsed. Finally, on March 28, the judge delivered the verdict, finding 32-year-old Sam Bankman Fried guilty of all charges and sentenced him to 25 years imprisonment. 

Conclusion

In the evolving crypto landscape, FTX’s tale should act as a cautionary tale for investors and traders who are eager to enter the crypto market. It highlights the importance of regulatory oversight in the crypto industry and the need for transparency among various crypto exchange platforms. The FTX scam is one of the biggest financial frauds in U.S. history and will leave a lasting impression on the crypto landscape.

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