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FTX collapse assures a longer crypto winter ahead

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The stunning implosion of cryptocurrency exchange FTX, which mismanaged $8bn of customers’ digital assets and suffered a bank run on exchange deposits, initiated a second major crypto contagion event in just six months. FTX’s rapid collapse was catalysed by leaked reporting which exposed the precarious balance sheet of crypto trading firm Alameda Research and its unethical and possibly illegal ties to FTX, both founded by Sam Bankman-Fried.

On Monday 12 December, Bankman-Fried, known as “SBF”, was arrested at his home in the Bahamas and indicted on eight criminal charges, including wire fraud and conspiracy by misusing customer funds, money laundering and campaign finance offenses by the US Attorney of the Southern District of New York. The following day, the Securities and Exchange Commission (SEC) charged SBF with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the crypto trading platform of which he was the CEO and co-founder. “We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” SEC Chair Gary Gensler said in a statement.

John J. Ray, who replaced SBF as FTX’s CEO, in his testimony to the House Financial Services Committee hearing on the same day, told lawmakers: “The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.”

Bahamas-based FTX is now insolvent and completed a chaotic descent into bankruptcy in just days, after a remarkable fall for a major crypto exchange valued at $32bn back in January. FTX was backed by global investors including BlackRock, SoftBank, Singapore state-owned fund Temasek, the Ontario Teachers’ Pension Plan and Sequoia Capital. Its collapse is capped by the downfall of SBF, the curly-haired 30-year-old “effective altruism” advocate who positioned himself as a reputable crypto leader eager to bring mainstream regulation to the cryptocurrency sector. SBF was second to George Soros as the largest donors to the US Democratic Party. He is estimated to have lost 94% of his wealth in a single day, the highest and fastest drop in an individual’s net worth in human history, according to the Bloomberg Billionaire Index.

The sequence of events, and revelations, reads like the hyperbolic plotline in a fictional drama made for Netflix, and makes plain the inadequacy of current regulatory oversight. They also further muddy the waters between innovation within crypto industry and the long-term potential of digital assets, and corrupt crypto Ponzi schemes and worse. 

How it all began

CoinDesk reported almost 40% of Alameda’s $14.6bn assets were held in FTX’s exchange token FTT – including loans backed by the token – against $8bn in liabilities. Days later, Binance founder Changpeng ‘CZ’ Zhao said on Twitter that Binance, the world’s largest crypto exchange, had decided due to “recent revelations” to liquidate all FTT tokens on its books. It triggered cascading FTT selling and caused the price to plunge by 95% over the following 72 hours.


Caroline Ellison, Alameda Research’s 28-year-old CEO, daughter of MIT Professor Glenn Ellison, and reportedly the former boss of SEC Chair Gary Gensler, and former girlfriend of the FTX founder, tried to offer CZ to buy Binance’s FTT tokens at $22 per token “over the counter” to avoid further price declines, which CZ rejected. Around this time, SBF claimed in a now-deleted tweet: “FTX is fine. Assets are fine.”

In reality, CZ’s move, which made public a simmering feud between the Binance chief and SBF, initiated a crypto bank run at FTX with around $6bn in withdrawal requests within 72 hours.  Ultimately, this forced a suspension in withdrawals. In an unexpected twist, SBF then turned to his rival CZ to ask Binance for a bailout. It was to be a marriage of rivals that was over before it had even begun. A non-binding letter of intent to acquire FTX was sent, and withdrawn, within 24 hours of initial due diligence.  Binance said FTX’s financial situation was “beyond our control or ability to help”, citing reports of mishandled customer funds and alleged US government probes into FTX. Allegations started to emerge that FTX extended about $10bn in loans to Alameda using customer deposits to execute high-risk leveraged trades which eventually failed, according to the Wall Street Journal. Commingling customer funds with counterparties without explicit consent is illegal, according to US securities law, and violated FTX’s own terms of service. By this stage, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) had begun investigations into FTX.

The ever more dire events and unabated liquidity crisis made a Chapter 11 filing inevitable. SBF told investors that FTX faced a shortfall of up to $8bn. Volatility, rumour, and fear spread like wildfire throughout crypto. Bitcoin initially dropped to around $16,000, while Solana, a crypto token closely associated with SBF, also dropped sharply as investors started to withdraw large quantities of crypto from exchanges and contagion risk intensified.  SBF announced Almeda Research would be wound down as FTX scrambled for cash, seeking $9.4bn in fresh investor capital to stabilise its balance sheet and meet customer redemption requests. Ultimately, these efforts failed. FTX, Alameda Research and more than 130 affiliated entities, filed for Chapter 11 bankruptcy protection on Friday 11 November in a Delaware court after FTX said it could not meet customer withdrawal requests. SBF resigned and was replaced as CEO by John J. Ray III, an experienced restructuring executive with 40 years’ experience in several of the largest corporate failures in history, including Enron.

A document which shared with prospective investors the state of FTX’s balance sheet before the bankruptcy was leaked to the Financial Times. It revealed only $900m in assets which could be easily sold against $9bn in liabilities. The $8bn financial hole in the FTX crypto empire – which includes $3bn to the top 50 creditors – suggests FTX international customers will face steep losses and on cash and crypto assets held on exchange.

The bankruptcy proceedings are expected to take years to resolve, due to the lack of information and legal filings which will act as an obstacle for creditors. It also suggests the crypto sector is unlikely to stage a sustainable recovery anytime soon. Initially, FTX reported more than 100,000 creditors, but this was updated on 15 November to at least tenfold higher. In the updated filing, lawyers said: “There could be more than one million creditors in these Chapter 11 cases.” A key legal consideration is whether FTX account holders are treated as unsecured creditors or have a higher priority status, similar to concerns at other cryptocurrency bankruptcy cases, including Celsius Networks and Voyager Digital.

Over the weekend, events transpired that were even more bizarre. The officially insolvent FTX was hit by a suspicious outflow of about $662m in tokens with $477m suspected stolen and the remainder moved into secure storage by FTX, according to blockchain specialist Elliptic. The hacker’s identity is known, though not yet public, but is believed to be an inexperienced FTX insider. Separately, after SBF transferred $10bn of customer funds from FTX to Alameda Research, a large chunk of that sum (between $1 and $2bn) vanished, reported Reuters. The US Securities and Exchange Commission is investigating whether FTX mishandled customer funds, and the Securities Commission of The Bahamas opened an investigation into FTX to determine if “any criminal misconduct occurred.”

A proposed class action in Florida alleges the bankrupt cryptocurrency exchange was no more than a fraudulent scheme designed to take advantage of unsophisticated investors. The complaint contends that FTX was “truly a house of cards, a Ponzi scheme” with investor funds shuffled around between “opaque affiliated entities” to “attempt to maintain the appearance of liquidity”.

In an updated filing on 17 November, Ray stated: “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.”

Ray found that the “FTX Group did not maintain centralised control of its cash” or “keep appropriate books and records, or security controls, with respect to its digital assets.”

The FTX collapse has sparked contagion risk throughout cryptocurrency industry and a renewed crisis of confidence. Some key contagion events included:


  • Genesis Global Capital, which has a $175m exposure to FTX and $2.8bn in total active loans, suspended withdrawals and new lending on 16 November.
  • Genesis is owned by Digital Currency Group, founded by Barry Silbert in 2015, which owns CoinDesk and Grayscale Investments, which runs the Grayscale Bitcoin Trust that has been a vehicle mutual fund for investors on Wall Street and beyond.
  • Crypto exchange Gemini, owned by the Winklevoss twins, temporarily halted some of its withdrawals from its interest-bearing Earn accounts.
  • Hedge fund Galois Capital earlier this month told customers it had “roughly half of our capital stuck on FTX”. Based on Galois’s assets under management as of June, that could amount to around $100m.
  • Major FTX investors, including Temasek, Sequoia Capital and SoftBank, have written off their stakes as worthless.
  • Anthony Scaramucci, founder of SkyBridge Capital, was persuaded by SBF to buy $10m of the FTT digital token as a condition for SBF to take a 30% stake in SkyBridge Capital for $45m. Scaramucci is trying to repurchase the 30% stake.
  • On 28 November, BlockFi filed for Chapter 11 bankruptcy in the district of New Jersey. BlockFi says it has $256.9m in cash, but documents show it owes unsecured creditors up to $729m. In July, FTX signed a deal with the option to buy BlockFi for up to $240m.
  • Cryptocurrency exchange Bybit announced plans to shed up to 30% of its workforce market, citing lower trending crypto prices and troubles at BlockFi and Genesis. Other exchanges including and Kraken have also reduced staff headcounts.
  • On 5 December, Crypto lender Nexo announced it plans to quit doing business in the US after "inconsistent and changing positions” by state and federal regulators made the business untenable. "Although regulators initially encouraged our cooperation and a sustainable path forward appeared viable, the events of recent weeks and months and the subsequent change in regulators’ behaviour point to the opposite,” Nexo wrote in a blog post. “We have reached a point where regulators are unwilling to coordinate with one another, and are insistent on taking positions that are inconsistent with one another, creating an impossible environment to operate efficiently and to create the expected value for our clients.”

Bitcoin, the largest cryptocurrency, dropped to new low of $15,471 on Monday 21 November, as fears intensify throughout crypto markets that the full contagion effect from FTX’s stunning collapse has yet to play out.

In the past week or so, SBF has embarked on a string of interviews in what Bloomberg dubbed his ‘FTX Apology Tour’, attempting to paint the exchange’s collapse as risk management and accounting oversights. It is a narrative few believe. Coinbase CEO Brian Armstrong took to Twitter, to push back against the defence.


Armstrong was forthright in his assessment of SBF’s actions at FTX: “It's stolen customer money used in his hedge fund, plain and simple”, he tweeted. It is difficult to realistically foresee a near-term recovery for crypto markets. Most crypto executives, traders and investors are bracing for a deeper winter and the possibility of more bankruptcies to come. Swyftx CEO Alex Harper cited the potential for more “black swan-type events” and said trading volumes could suffer “a potentially sharp fall” in the first half of 2023. Further bankruptcies and contagion risks could prompt Bitcoin to a selloff to $5,000, suggests Standard Chartered. While this forecast is not the bank’s base case, the scenario is currently under-priced by markets.

If your firm is involved in cryptocurrencies and would like an independent, and confidential, review of your balance sheet and to discuss liquidity options or insolvency proceedings, do not hesitate to get in touch with our team today. BTG Advisory can also help firms navigate HMRC taxation requirements for digital assets profits and losses.

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