FTX is a cryptocurrency exchange. This means that unlike exchanges such as the New York Stock exchange and the Nasdaq, FTX only facilitates the buying and selling of cryptocurrencies. Similar to these exchanges, however, FTX is one of the biggest in the world with respect to the volume and size of trades processed. Recently the CEO, Sam Bankman-Fried, has been under fire in the media for what is being regarded as the biggest case of fraud since Enron in 2001. The case has reportedly lost at least $1 billion of customer funds, and has the whole world wondering what happened.
FTX, on top of being an exchange, offers its own cryptocurrency which people buy to unlock benefits such as discounts on trading fees, spinning the non-fungible swag wheel for a chance to win a free NFT, among others. It is not unusual for a crypto exchange to have its own coin, Binance, the biggest crypto exchange in the world, has BNB for example which offers similar benefits. What is unusual is everything else that occurred behind the scenes.
The situation began to unravel when Sam began talking badly about CZ, the CEO and founder of Binance, to regulators and politicians. CZ caught wind of this and over Twitter announced that the company would be Dumping all $2 billion it had staked in FTT. Investors, certain that the news would lead to a drop in the coin’s price, began withdrawing their money as well. Now for any legitimate coin, with as much money invested in it as they claim, this wouldn’t pose any issues for the investor, and therein lies the problem, there wasn’t. As a result, investors in the coin were restricted from withdrawing.
While there is no confirmed reason as to what caused this liquidity crisis as this is an ongoing case, there are a number of suspicions. It is a fact that both FTX and Alameda Research, a quantitative trading firm also owned by Sam, had a large stake in FTT. This could have been used as collateral for real loans which could then be reinvested into the coin creating a hypothetical “infinite money glitch” and resulting in a bolstered coin price. It is also rumored that Sam was investing the customers’ funds himself and manipulated the balance sheets through a “back door” he created so nobody would be alerted. Only time will tell whether or not these allegations are true, in the meantime though, I think Sam said it best when he tweeted “I f**ked up”.
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By Andrew Ozsu