FTX filed for Chapter 11 bankruptcy late hours of Friday following the liquidity crunch that hit the behemoth of a crypto exchange last week. How did all these happen so fast? Let’s take a deep dive into what really went down.
Let’s begin with the Bankruptcy filing:
The now close to being defunct crypto exchange announced the news on Twitter Friday, saying it was prepping for a Chapter 11 filing.
In the same statement Sam Bankman-Fried, the exchange’s CEO is stepping down. He’ll be replaced by John J. Ray III.
How the FTX fall Began
Alameda Research a quant trading and Hedge fund company, which is co-owned by Sam-Bankman Fried had insolvency issues. Yes, they got involved with some of the companies, the likes of 3AC and Voyager that took a hit and went under from the Terra Luna debacle earlier in the year.
And big Sam being a kind guy decided to help out Alameda Research with some funds to keep it afloat. Sweet move, right? Oh No it wasn’t! Here is why, the funds were actually from the balance sheets of FTX! Which it didn’t actually own because they were FTX users’ money. Let’s digress a bit, we will come back to this. I bet you already perceive misappropriation.
When the news of the above filtered into public domain, CZ Changpeng Zhao, the CEO of Binance was quick to take it up on himself and Binance to act. How so? He was an investor in FTX from its early days and his exchange held about $580 million worth of FTT which is FTX exchange native token. He threatened that he was going to offload them following the revelations at Sam-Bankman’s exchange.
This caused a stir in the price of the token as it plummeted, also this caused users to withdraw their funds from the exchange. This resulted into a bank run as almost everyone wanted to get their money off the exchange.
Binance Offers to help out
CZ offered to buy off the ailing exchange and its liabilities in some sort of an agreement, however after some more hours of thorough check on the situation, Binance backed off, citing that there was nothing left of the exchange to be bought or salvaged. Implying that the matter was worse than as perceived initially. Trust Crypto Twitter, to amplify an already sour situation.
It has been revealed that there is some $9 Billion missing from the exchanges balance sheet, most of which was handed over to Alameda Research to rescue it. Also, the said funds were users’ deposits on the exchange.
Where we are right now
Users’ funds are stuck millions and billions of their hard-earned money, as they can’t process withdrawals. It is indeed a sorry tale and a painful one for users of the exchange who trusted it to have their funds with them.
People are calling for investigation into the matter and that SBF should be probed for misappropriation. The story is still unfolding. There is likely going to be a contagion effect definitely. Exchanges are sitting up; it is expected that some other exchanges may follow in same light.
The entire crypto market has taken a hit as the entire crypto market capitalization has lost billions of dollars in no time. Bitcoin and other majors like Ether, Litecoin, BNB etc. have all lost tens of percentages of their prices. They end off all this doesn’t look near.