In the latest and most spectacular in a series of collapses and failed projects in the cryptocurrency and blockchain space, crypto exchange FTX declared bankruptcy on Friday as its 30-year-old founder Sam Bankman-Fried stepped down as CEO.
The collapse of the world’s third-largest cryptocurrency exchange has already sent reverberations across the digital assets space, prolonging and deepening a year-long slide by bitcoin, ethereum and thousands of different altcoins. FTX and its founder’s ubiquity in financing, investing in and rescuing digital assets projects mean its influence is felt almost everywhere.
The bankruptcy means that the future of many projects, partnerships and bailouts supported by FTX will remain in limbo as courts attempt to untangle its complex web, said CK Zheng, founder of digital assets hedge fund ZX Squared and former head of derivatives at Credit Suisse and Morgan Stanley.
“It’s all immensely complicated and it’s hard to tell what is going to happen. It will take a while to sort all of this out,” said Zheng. “Remember Lehman Brothers—it took forever for that bankruptcy process to play out.”
Zheng says the comparison with Lehman Brothers should stop there, though, explaining that the Lehman collapse quickly triggered failures and stressed other institutions across the financial system, while FTX’s collapse thus far seems to be limited and unlikely to spread much beyond the digital assets space.
Crypto industry executives, however, said they fully expect the crisis to lead to an aggressive reaction by government regulators.
“The way cryptocurrency exchanges do business will be significantly different in the future,” said Mo Islam, head of Republic Capital.
What Happened
When Sam Bankman-Fried created FTX, he also created Alameda Research, a sister firm operating as a quantitative trading and market-making arm of FTX. At that time, Binance, another global cryptocurrency exchange, was a seed investor in FTX.
FTX also created a token, FTT, to provide incentives for people to trade on its exchange, Islam said. Owners of FTT received discounted FTX trading fees and earned rewards for using the token to trade, with FTX maintaining FTT’s value through a program of buying back and burning tokens.
Binance eventually sold its stake back to FTX, receiving FTT in return.
Alameda was borrowing funds from FTX, posting FTT as collateral, according to Islam, with FTX giving funds directly from customer deposits. The collapse was precipitated by a report from the digital news website CoinDesk that a large portion of Alameda’s balance sheet was in FTT.
Shortly afterward, on Nov. 6, Binance CEO Changpeng “CZ” Zhao tweeted that it would liquidate its FTT allocation, resulting in panic selling in the retail market and a precipitous drop in the price of FTT. As FTT dropped, Alameda’s collateral lost value and market participants sought to withdraw their funds from FTX.