3 Questions about thefailure of the FTX platform
The collapse, in a matter of days. FTX, the second-largest cryptocurrency platform in the world, declared bankruptcy on Friday, November 11, sending its highly unregulated sector into turmoil.
According to the media, the wealth of its CEO, Sam Bankman-Fried, worth $16 billion, has evaporated in a few days.
To many people, this crash looks similar to that of Lehman Brothers, the bank at the origin of the 2008 financial crisis.
What is FTX?
FTX is a platform that allows, like its competitor Binance, to exchange cryptocurrencies against other digital currencies.
Just over a week ago, the group was the second-largest cryptocurrency platform globally.
Until Friday, it was run from the Bahamas, where its headquarters are based, by Sam Bankman-Fried, known as “SBF“. The 30-year-old entrepreneur was a go-to person for the crypto-regulators and a significant donor to the Democratic Party.
Why did the company go under?
The downfall started on November the 2nd when press reports disclosed that the Alameda Research fund, owned by Sam Bankman-Fried, was investing in crypto assets issued by FTX.com in a risky financial setup that carried the potential for major conflicts of interest.
Based on an internal document, the websiteCoinDesk was surprised to see that Alameda Research‘s assets were mostly denominated inFTT, a cryptocurrency used exclusively on the FTX platform.
Four days later, FTX competitor Binance announced plans to sell its FTT tokens due to the recent revelations. This decision led to a sharp drop in the price of the cryptocurrency causing many customers to rush into selling their assets stored on the FTX platform.
Faced with the influx, FTX was quickly unable to fulfill these withdrawal requests as it ran out of money.
At first, Binance came to the rescue of its competitor, offering to acquire it. But the company finally gave up on November 9, following an audit, citing “mismanagement“ of client funds and an ongoing investigation by US authorities.
That decision was the final blow to FTX, which declared bankruptcy on November 11.
Consequences became even worse as the platform suffered from a cyber attack on Saturday. “Unauthorized transactions were observed”, said Ryne Miller, FTX‘s general counsel, Saturday morning on Twitter.
What are the consequences?
In the cryptocurrency world, some players don’t hesitate to compare FTX‘s crash to that of Lehman Brothers. Changpeng Zhao, the boss of Binance, thinks that it is an accurate comparison.
“It’s disappointing to see a technology, that was created in response to the collapse of Lehman Brothers in 2008, produce its own version of that event“, reacted Jeremy Allaire, CEO of Circle, another player in the sector.
It seems very unlikely that FTX will be able to repay all its creditors. “A lot of ordinary users are going to lose their money, so this will be very bad for the ecosystem in the short-term“, said Jay Jog, co-founder of SEI Network, another company in the sector, on CoinDesk.
After this dramatic loss, the small world of cryptocurrencies is now preparing for a regulatory turn.
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