By: Brayden Yee
One of the biggest cryptocurrency exchanges has collapsed. FTX, which looked like a major success story in the crypto market a few months ago, touted for its transparency by regulators and market watchers, has filed for chapter 11 bankruptcy protection.
Cryptocurrency is digital currency, meant to have protections that prevent it from being traded more than once and has the ability to be tracked so it can’t be duplicated or hacked. Crypto is also among the most unregulated parts of the financial sector. Initially, the collapse of FTX was believed to be due to a bank-run on the exchange servers. However, as new details have emerged, many are learning about the true logistics of its collapse.
FTX was valued at around $32 billion, with its name frequently being seen at sports stadiums or in TV ads. While not being a publicly traded company, the effects of FTX’s bankruptcy can be seen in slumps from Bitcoin, and Coinbase, to name a few.
The fall of FTX was first seen at the beginning of November, with CoinDesk, a digital news currency site, revealing that Alameda Research, a fellow trading firm established by FTX CEO Sam Bankman-Fried, was heavily reliant on FTT, a token issued by FTX.
When the balance sheet was leaked, it was revealed that the illusion of a professional, successful trading firm was all but an illusion. After the report was published, crypto exchange Binance stated that it would liquidate their holdings in FTT, other cryptocurrencies and investors soon followed. On Friday, November 11th, Bankman-Fried announced that FTX had declared bankruptcy, and resigned as CEO.
Reports have stated that over $1 billion of customer funds are missing from FTX, and investigations have begun into the exchange. Legal experts have stated that FTX’s use of customer money was not clearly communicated, and there are grounds for fraud and embezzlement suits.
Legitimacy in cryptocurrency has taken a toll this year, however, with FTX’s fall, it appears that the short-run faith in crypto has fallen, with Bitcoin and Ethereum going down nearly 10% in the past week.
A class action suit has been filed against FTX as well as many celebrity endorsers of the exchange, alleging that they falsely represented the safety of FTX and tricked many novice investors who utilize mobile apps to make their trades. Along with Bankman-Fried, the suit also names celebrity endorsers of Tom Brady, Larry David, Stephen Curry, Shaquille O’Neal, and Gisele Bundchen.
Current CEO John Ray III has to now maneuver the clean-up of the scandal. Ray had helped the clean-up operations of the Enron scandal in the early 2000’s, and many have compared FTX’s fall with his previous scandal. If the logistics behind FTX’s fall is anything like Enron, then it is likely that big changes are coming for the crypto market.
At the time of its collapse, Enron was the 7th largest company in the US. Its bankruptcy was the biggest US bankruptcy at that point, and was one of the first major corporate collapses of the 21st century. Its fall was based around how it appeared marketable, hiding its losses, shredding documents, and citing future profitable opportunities as current profits. This was all done through Arthur Andersen LLP, its accounting firm. The fall led to the public perception that the stock market was risky, and led to tighter regulations being passed on companies.
The fallout of FTX has led to many being skeptical of the crypto market, however, it is not crystal clear yet. Many have stated that their skepticism of the market has been correct and that crypto is simply too shady to enter, while others have stuck to their guns, keeping Bitcoins price steady. As for regulations on the market, they are still yet to be announced.
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