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The Crypto Burrito (Volume III): The Never-Ending Saga of FTX

The Crypto Burrito (Volume III): The Never-Ending Saga of FTX

“Truth is stranger than fiction, but it is because Fiction is obliged to stick to possibilities; Truth isn't.”

  • Mark Twain

FTX was one of the biggest crypto exchanges with a peak evaluation of $32 billion and was promoted by A-list celebrities such as Tom Brady, Gisele Bündchen, and Stephen Curry. Founded in 2019 by supposedly wonder boy Sam Bankman-Fried (SBF), the exchange quickly rose to prominence, raising billions of USD from the likes of Softbank and BlackRock, acquiring multiple crypto firms, while having stadiums named after it. Then in 2022, in a matter of days, the exchange fell apart with lightning speed. Incidents after incidents kept pouring in like endless waves of a tsunami, and before anyone knew it, $8 billion vanished into thin air like a swift David Copperfield act.

What happened? Why did it happen? And what are the aftermaths?

The Crypto Burrito (Volume I): Ethereum Merge

The Crypto Burrito (Volume II): Terra’s Fall From Grace

The Crypto Burrito (Volume III): The Never-Ending Saga of FTX

The Crypto Burrito (Volume IV): Understanding 2022’s Crypto Bankruptcy Filings

Timeline of FTX Collapse

This fallout of FTX is hella complicated with many people and events involved, so we will try to provide you with a summary timeline of how the extraordinary series of events unraveled.

Note: The timeline provided herein is in GMT+8.

Signs of a Looming Problem

● September 14, 2022: Bloomberg published an article raising concerns about the dubiously tight ties between Alameda Research (co-founded by SBF and CEO-ed by SBF’s girlfriend, Caroline Ellison) and FTX. Alameda was the largest trader and liquidity provider on FTX, and enjoyed unfair advantages when trading on the “sister” exchange.

● September 27, 2022: President of FTX.US, Brett Harrison, resigned for no obvious reason. The previous month, the co-CEO of Alameda, Sam Trabucco, also quit with no clear explanation.

● October, 2022: It was reported that SBF was desperately seeking capital and there were issues with payroll and bonuses in FTX since the beginning of 2022.

The Beginning of the End

● November 2, 2022: CoinDesk reviewed Alameda’s balance sheet and announced that most of Alameda’s $14.6-billion asset is made up of FTT, the token printed out of thin air by FTX, and that the trading firm had $8 billion liabilities. At that time, the circulating market cap of FTT was $5.1 billion as per FTX itself, but the total amount of FTT that was in Alameda’s balance sheet was worth approximately $6 billion (?!).

● November 6, 2022: CZ of Binance announced on Twitter that Binance would sell all the FTT they had “due to recent revelations that have come to light”, and the stack was valued at more than half a billion USD then.

● November 8, 2022: $6 billion was reported to have been withdrawn from FTX in the span of 72 hours since CZ’s tweet, causing FTX to suspend withdrawals.

On his personal Twitter account, SBF put the blame on Binance and assured the users by saying that “FTX has enough to cover all client holdings” and “FTX is fine. Assets are fine.” These tweets are now deleted.

Later that day, SBF made an abrupt U-turn, admitting to liquidity crisis on FTX and asking for Binance’s help. Binance entered a non-binding agreement to acquire FTX, excluding FTX.US, with the intention to provide liquidity for FTX’s users.

80% of FTT’s value was wiped out at the end of the day.

● November 9, 2022: FTX was revealed to be under investigation in the US by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) for mishandling of customer funds and for the unusually close relationships with FTX.US and Alameda Research.

SBF called investors and said that FTX needed $8 billion to cover the fund deficit caused by sudden mass withdrawals and at least $4 billion to avoid bankruptcy. Turned out the tweets SBF made the day before was all hoax.

Alameda took down its website.

● November 10, 2022: Binance decided to step away from the deal to acquire FTX, citing reasons being mishandled customer funds and alleged investigations in the US. Binance also said that the situation at FTX is “beyond [their] control or ability to help”.

These remarks from Binance implied that the problem with FTX was potentially fraud, not a mere liquidity crunch as initially asserted by SBF.

● November 11, 2022: FTX, FTX.US, and Alameda Research filed for bankruptcy.

SBF resigned and John Jay Ray III, a corporate restructuring expert who oversaw the case of Enron, assumed control as CEO of FTX.

There Is No Worst, Only Worse

● November 11, 2022: Both Reuters and the Wall Street Journal found out that the amount FTX lent Alameda might amount to $10 billion, all of which was supposedly taken from customer deposits on FTX. It was worth noting that the total value of customer assets on FTX at the time was $16 billion. Among the $10 billion moved to Alameda, between $1 billion and $2 billion disappeared without a trace and nobody knew where it went.

● November 12, 2022: FTX was drained of half a billion USD. It was said that the exchange had been hacked, FTX apps had become malware, and accessing FTX websites would infect your devices with Trojans.

● November 13, 2022: The Royal Bahamas Police investigated FTX for potential criminal misconduct.

Kraken announced that they could identify the ones that hacked FTX of half a billion USD through connected verified Kraken accounts and decided to freeze all accounts related to FTX and Alameda.

The Financial Times got a hold of FTX’s balance sheet dated to November 10, on which data demonstrated that FTX had $900 million in liquid assets against $9-billion liabilities.

● November 15, 2022: US’s Federal Prosecutors started investigation on FTX.

● November 16, 2022: SBF and celebrity endorsers of FTX were sued.

● November 17, 2022: In the sworn declaration submitted to US bankruptcy court, John Jay Ray III confirmed there was indeed a secret backdoor software to loot customer funds from FTX to Alameda and Alameda had special exemption from FTX’s auto-liquidation mechanism. He also commented: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.” Spoken by a man who did the notorious Enron case and had more than 40 years of experience, these words consolidated how much of a disaster FTX was.

Orange Jumpsuits Awaiting the Dashing Ex-Executives

● December 12, 2022: SBF was arrested by Bahamian authority, thereby missing the US congressional hearing scheduled the next day.

● December 13, 2022: SBF was charged with eight counts of fraud among other criminal offenses in the by the U.S. Attorney’s Office. He was also charged with frauds and material misinterpretations by SEC and CFTC.

● December 21, 2022: Caroline Ellison and Gary Wang (co-founder and ex-CTO of FTX) were charged with fraud by SEC. They both pleaded guilty and could potentially spend the rest of their lives in prison.

SBF was extradited to the US.

● December 22, 2022: SBF was released on a $250-million bail and was allowed to stay at his parents’ house while waiting for trial. This is, till date, the biggest federal white-collar pre-trial bail ever in history.

● January 3, 2023: SBF pleaded not guilty to all charges. His next trial would happen in October, 2023.

The Oscar-Worthy Acting of SBF

Since he arrived at the crypto scene, SBF had sustained a somewhat convincing public façade of a tech genius – entrepreneur that lived humbly, donated millions to charities, appeared next to world leaders, and attended top-profile events such as the World Economic Forum 2022. His performance was so impressive that he was hailed by Fortune as the next Warren Buffet at the age of 30. The man often appeared before the public eyes in t-shirt or hoodies and shorts with the notorious bird nest-lookalike bedhead. There was even a TikTok of him dancing and saying that all his clothes could fit in a backpack.

As his crypto empire built upon lies fell apart and the truth started coming out, SBF went on a “press tour” in a dire attempt to save his face (probably his ass too). Incredibly, despite all the questions and pressure put on him, the man almost never lost his cool. But this time, he abandoned the appearance of a genius poster boy who could lift the world with his pinky, and donned the guise of a heedless innocent boy whose motto was “I don’t know what happened”. Indeed, for the innumerable interviews, the ex-CEO made himself look like he did not know how his companies functioned at all, being unaware of the balance sheets, where the money was, who could access which data, and “misreading” $10 billion. During a two-hour long interview with Good-Morning America against his lawyer’s advice, the fraudster insisted on blaming FTX’s collapse on negligence not defrauding, blaming himself for not spending “any time or effort” on risk management.

However, under enough pressure, any mask cracks. With enough prying, the truth unveils.

Behind the scenes of the frugal former-multibillionaire, the man secretly owns multimillion-dollar real estates hidden in the Bahamas. Behind the scenes of an outspoken advocate for regulations on crypto, the truth was: “[eff] regulators”, as he said during a Vox interview after the bankruptcy.

No matter how open and honest SBF was, it was only a façade. Thus, when the real questions were asked, he suddenly had a meeting to attend, went dumb with endless “um-ah”, or beat around his multibillion bushes even when it was a simple yes or no question.

A YouTuber called Coffeezilla was determined with drawing the truth from the mouth of the ex-CEO of FTX, sneaking in several Twitter spaces where SBF attended to grill the man about FTX. His hard work paid off more handsomely than any other professional reporters as he made Sam admit to frauds and expose his true colors.

Despite all this, SBF, now known as Scam Bankrupt-Fraud, denied committing frauds during his first trial in 2023.

Perhaps he was loyally fulfilling his own prophecy, “I think it’s important for people to think I look crazy,”

We will have to wait until October 2023 to see what mask he puts on next. One thing for sure is no matter what guise he chooses, the developer of his most beloved video game, League of Legends, and the leaders of the social movement that he strongly supports, effective altruism, already want nothing to do with him.

Collateral Damage on the Crypto Market

Needless to say, numerous companies and countless people are affected by the crash of the used-to-be-$32-billion FTX.

Apparently the hardest-hit are the ones closely related to FTX and Alameda. FTX “rescued” three crypto firms from bankruptcy but the buyout turned out to be more of a poison than a lifeline following this incident: BlockFi went bankrupt in November 28, 2022; Blockfolio had all of its website and social media channels closed without notice; while Voyager Digital also went bankrupt and had its assets bid on by Binance. Solana, the blockchain that SBF invested in, ended 2022 with a massive $50-billion loss.

The investors of FTX, including Sequoia, Temasek, SoftBank and BlackRock, who poured millions and billions into FTX saw their money go with the wind, too. Tragically, the Ontario Teachers’ Pension Plan invested $95 million into this dead exchange, so that means a lot of innocent people who are not involved in crypto are bound to lose money in their retirement plan.

As the result of the bankruptcy, most prominent cryptocurrencies dropped sharply in price.

Let’s not forget the thousands of employees of FTX and Alameda got to know the swift bankruptcy through social media and lost their jobs subsequently, as well as the 5 million users who have no idea where their money is now. The question whether users can recover a part or 100% of their funds deposited on FTX is still very much debated, judging from the fact that the exchange was conveniently hacked the day after bankruptcy filing.

Further monetary impact on the crypto market itself has yet to fully manifest, but a confidence crisis is definitely present.

As a result of this collapse, legislators from different countries are forced to take action.

EU lawmakers already made the most comprehensive set of rules for crypto called Markets in Crypto Assets regulation that will take effect in 2024, but after the FTX case broke out, they seriously doubt the rules have the ability to prevent the same thing from happening again.

Likewise, US legislators demand stricter crypto regulation. SEC was quick on their feet and immediately came for Gemini and Genesis.

Singapore, home to the state-owned investment company Temasek, considers the investment loss in FTX disappointing and damaging for the country. Consequently, the Monetary Authority of Singapore will propose and introduce new regulations for the crypto market.

The collapse of FTX happened at a breakneck speed, but the repercussion, perhaps, is long-lasting to the blockchain and crypto world. Whatever results the trial in October may have, the current crypto scenes and regulations will never be the same after.

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