FTX Scandal Explained

Until the FTX scandal, the cryptocurrency exchange FTX appeared to be a major success story in cryptocurrency some months ago. The scandal around FTX quickly unraveled in the last couple of weeks and the exchange fell apart.

What is FTX?

FTX means “Futures Exchanges.” Customers of FTX, a company based in the Bahamas and run by Mr. Bankman-Fried, can exchange digital currency for traditional currency or vice versa. It was also among the largest exchanges. Market watchers and regulators lauded it as one of the most open cryptocurrency exchanges in the market. 

The company had built its business on the use of risky trading options that are not legal in the United States. It lobbied the U.S. lawmakers for the adoption of crypto-friendly regulations, spending millions of dollars doing so.

How Big Was FTX?

With an estimated value of $32 billion in January, FTX was among the largest crypto exchanges in the world. The name FTX is often seen in NBA arenas and commercials starring celebrities. However, that is no longer the case.

The cryptocurrency exchange lost its CEO, credibility, and value after declaring bankruptcy on Nov. 11. According to experts, the collapse of FTX could have an impact on the entire cryptocurrency market.

How Did the FTX Scandal Unravel?

At first, the market believed that FTX’s sudden failure was a result of a traditional bank run on FTX’s reserves. In an area of the financial industry that is largely unregulated, most of the world is still learning how cryptocurrency ownership, trading, and tracking will affect authorities, vendors, and consumers.

However, the company's story has grown much more complicated and possibly criminal as time passed and new information came to light.

On Nov. 2, CoinDesk, a digital currency news site published an article revealing Almeda Research was heavily dependent on the FTT token that the company issued. Almeda Research was a trading firm that conducted trade using FTX. 30-year-old FTX founder Sam Bankman-Fried co-founded Almeda Research.

Binance, a cryptocurrency exchange, announced on Nov. 6 that it would sell its FTT holding after the article by CoinDesk was published. Investors started to withdraw their money, which set off a downward trend for FTT and other cryptocurrencies. The Wall Street Journal also reported that FTX loaned Alameda billions of dollars worth of customer assets to support risky bets.

Cryptocurrency exchange Binance had agreed on Nov. 8 to buy FTX, but it withdrew its offer the following day after "corporate due diligence" and "news reports suggesting that customer funds might have been mishandled through alleged US investigations and mismanagement," according to a statement on Twitter.  On Friday, Nov. 11, FTX filed for bankruptcy, and Bankman-Fried left his position.

Reports by Reuters reveal that customers’ funds of at least $1 billion are missing from FTX. According to the Wall Street Journal, the exchange is being investigated by The Securities and Exchange Commission and Justice Department. FTX is also under investigation by authorities in the Bahamas where it was headquartered.

How Did the FTX Scandal Affect Other Cryptocurrencies?

Following the bankruptcy filing by FTX, there is wavering faith in cryptocurrency. Bitcoin, one of the most popular currencies, has fallen about 65% this year so far, while Ether has dropped 68%. Crypto experts believe that FTX's failure will impact the crypto industry for a while and not in the long haul.