The Collapse of FTX Cryptocurrency Exchanges

November 24, 2022

The FTX – one of the world’s largest cryptocurrency exchanges – collapsed. Its founder, Sam Bankman-Fried’s fortune fell from nearly 16 billion USD to zero within days after his company filed bankruptcy protection in the United States in November 11.

Why did FTX collapse?

Short-term reason

In the short-term, the FTX collapsed because of the FTT – a token issued by the company and promised to buy them back using a portion of its profits. Alameda – the FTX’s hedge fund – used FTT to make risky loans. This led to FTT’s major shareholder, the rival exchange Binance, to declare that it was selling its holdings. This prompted other customers to withdraw their funds as well.

Medium-term reason

In the medium-term, the FTX collapsed because of deeper issues concerning the links between FTX and Alameda. The exchange did not have the ability to accept wire transfers. Therefore, the customers are required to send money to Alameda and the FTX would credit their accounts.

However, the actual money was never passed on from Alameda to FTX. Three years later, Alameda kept hold of, traded with or frequently lost, 8 billion USD of FTX customer funds. When the run on the exchange was initiated, FTX could not find the money that it thought it had because it never received the fund.

Long-term reason

FTX failed because of the company’s whole mechanism was chaotic. There lacked the presence of trustworthy financial information within the company.

What does FTX’s collapse reveal about cryptocurrencies?

Cryptocurrencies bet on the idea that the world would be better off without the government’s control over money and finance. The collapse of the FTX shows that government regulation over finance will help prevent the complete collapse of the currency.

Will people who lost their money in FTX get it back?

There is no special protection for customers of unregistered crypto firms like FTX. While some people may get their money back, no one will receive everything they lost. According to the FTX founder, it will take an injection of capital worth 8 billion USD to make every depositor whole. However, currently there is no document providing details about all of FTX’s depositors and there are also doubts about the accuracy of the company’s balance sheet.

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