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FTX: This Is What Led to the Downfall of the Fifth-Largest Crypto Exchange

3 mins
Updated by Geraint Price
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In Brief

  • Bankman-Fried's error in judgment might have taken the fourth-largest crypto exchange close to bankruptcy.
  • FTX co-founder's step-in to rescue hit businesses amid a crypto slowdown is said to be one of the mistakes.
  • Sources to media outlet claims that FTX used customer deposits to prop up some deals.
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Sam Bankman-Fried made a series of critical mistakes which led to the demise of the FTX exchange, according to a report by Reuters.

The report noted that amid tightening monetary policies and broader crypto weakness, the FTX co-founder stepped in to rescue hit businesses.

Notably, sources to the media outlet reveal that deals involving Bankman-Fried’s trading firm Alameda Research led to significant losses.

A Catalog of Mistakes Proved Catastrophic

These included a $500 million loan deal with defunct cryptocurrency lender Voyager Digital before it requested bankruptcy protection. In a Sept. auction, the U.S. division of FTX paid $1.4 billion for its assets.

However, Reuters couldn’t determine the whole scope of Alameda’s losses.

It alleges that Bankman-Fried sent at least $4 billion in FTX money, secured by assets like FTT and shares in trading platform Robinhood Markets, to support Alameda, which had close to $15 billion in assets.

Sources claimed that some of this FTX money were customer deposits. With Bankman-Fried reportedly not informing other FTX executives about the move to prop up Alameda to avoid a leak.

Bankman-Fried: “I F**ked Up”

And now Bankman-Fried himself has broken his silence to admit he “f**ed up.” Taking to Twitter, the CEO said: “Anyway: right now, my #1 priority–by far–is doing right by users. And I’m going to do everything I can to do that. To take responsibility, and do what I can.

“Because at the end of the day, I was CEO, which means that *I* was responsible for making sure that things went well. *I*, ultimately, should have been on top of everything. I clearly failed in that. I’m sorry.”

Binance Pulls Plug on Deal

FTX now appears close to bankruptcy, with Binance also pulling out of a deal to rescue the firm. Bankman-Fried reportedly signed a non-binding letter of intent for the Binance takeover of FTX, excluding FTX US. But, in a tweet on Wednesday, Binance announced that it had scrapped the deal.

In the past, the two billionaire founders, Changpeng Zhao and Sam Bankman-Fried, have locked horns, with the latter accusing CZ of hurting FTX’s business.

Binance Changpeng Zhao (CZ)
Binance CEO Changpeng Zhao

Crypto influencer Cobie shared an alleged Slack conversation in a Twitter thread that hints that FTX’s top executive thinks Binance “never really planned to go through with the deal.”

Next Week to Prioritize Customers

Per the thread, FTX will prioritize customer funds over investors and employees by conducting a raise in the next week. This will evaluate the combined liquidity of FTX international and FTX US, as per the author, who appears to be Bankman-Fried.

The thread also teases another announcement involving Justin Sun, in line with Tron founder’s confirmation on Twitter around a possible collaboration. Meanwhile, the thread also confirms communications with more external investors.

Earlier in 2022, several exchanges halted withdrawals as the Terra (LUNA) collapse unfolded. Now, cryptocurrency financial services company Galaxy Digital Holdings has acknowledged its exposure to the defunct exchange, reported Bloomberg.

According to information provided by the firm in its third-quarter results, Galaxy uses to keep assets is exposed to FTX to the tune of around $76.8 million in cash and digital assets, of which $47.5 million is currently undergoing withdrawal. FTX halted withdrawals amid a liquidity crunch on Nov. 8 and has reportedly stopped onboarding new clients.

Another Subprime Crisis?

Troubled crypto lender Hodlnaut, which has been under the Singapore court’s judicial management since August, also revealed FTX exposure in Oct. Out of its total consolidated assets, the interim judicial managers reportedly announced that $18.1 million has been on FTX.

In a recent blog post, Hayes reflected on the 2008 subprime crisis. Comparing the size of FTX, he noted, “The catalyst for their downfall is the same as it always is — a good business overextending themselves by gorging on cheap credit collateralized by high and rising valuations of assets on their balance sheet.”

If FTX files for bankruptcy, Hayes stated it’d be “similar to Mt Gox’s high profile bankruptcy” with investors queuing up for resolution. Crypto trader and influencer Jackis blames the collapse on “old behavioral patterns” of bailouts.

Jackis believes, “After all bad actors are gone again after this bear market & hopefully that has been all of them now. We can start to rebuild again with more effective products and projects, not repeating the same mistakes again.”

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Shraddha Sharma
Shraddha is an India-based journalist who worked in business and financial news before diving into the crypto space. As an investment enthusiast, she has also has a keen interest in understanding crypto from a personal finance standpoint.