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The Downfall of FTX: Where Crypto Goes After SBF’s Conviction?
A Manhattan federal court has found Sam Bankman-Fried guilty of all seven charges he faced in the wake of FTX’s spectacular collapse. Coming one year after the exchange suffered a run that caused its bankruptcy, a 12-person jury unanimously concluded last week that Bankman-Fried had misappropriated customer assets, and that he was guilty of conspiracy to commit securities fraud as well as money laundering, among other crimes.
The expectation is that FTX’s founder will now spend at least decades in prison, with his sentence potentially exceeding 100 years. Yet perhaps the biggest question relates to where his conviction and FTX’s demise leaves the cryptocurrency industry, which lawmakers had already had in their sights prior to the exchange’s failure.
Now, FTX and Bankman-Fried’s dramatic fall is likely to accelerate the push in the United States for comprehensive cryptocurrency regulation. And such regulation will be a double-edged sword for crypto, providing retail investors with greater protections at the expense of some of the sector’s more cavalier elements.
A Brief History of FTX
One of the most striking features of the entire FTX saga is just how quickly the exchange went from nothing to being one of the biggest in the market, and then back again.
Indeed, Sam Bankman-Fried launched FTX as recently as May 2019, with the exchange growing out of Alameda Research, a cryptocurrency trading firm that itself launched in October 2017. What’s interesting about this is that very little was known about Alameda prior to the launch of FTX, with a Google search that uses “Alameda Research” as its keywords – and that’s restricted to 2017-early 2019 – turning up basically nothing.
However, later information suggests that Alameda made enough money from trading cryptocurrency in 2017 and 2018 to launch FTX. FTX also received $8 million in equity funding in August 2019 from a number of VC firms, including Proof of Capital, Greylock Capital’s Chris McCann, Consensus Lab, FBG and Galois Capital.
On top of this, FTX received a “strategic investment” from none other than Binance in December 2019, with the latter exchange investing a reported $70 million in its younger counterpart, while also buying up a chunk of FTX’s own FTT tokens.
According to the press release announcing the above deal, Binance was interested in FTX as a result of its “innovative” trading features and technology. As Binance founder Changpeng ‘CZ’ Zhao explained:
“The FTX team has built an innovative crypto trading platform with stunning growth. With their backgrounds as professional traders, we see quite a bit ourselves in the FTX team and believe in their potential in becoming a major player in the crypto derivatives markets.”
Things snowballed on the basis of such backing, with a fawning Forbes profile published in October 2021 – at the height of the last bull market – revealing that FTX accounted for $11.5 billion in daily derivatives-trading volume (on average), making it the fourth-largest derivatives exchange in the world. It also revealed that Alameda “booked $1 billion in profit” in 2020, while also commenting on a massive $900 million funding round led by SoftBank in July 2021.
This round valued FTX at a cool $18 billion, yet it was the peak of the exchange’s ascent. Because as the bull market of 2021 deteriorated into the bear market of 2022, Alameda – which continued to trade cryptocurrencies itself – began losing money. Actually, it began losing more money, because filings submitted soon after FTX/Alameda declared bankruptcy revealed that the exchange had suffered a net loss of $3.7 billion between its inception and the end of the 2021 tax year.
That’s right, FTX was losing money even before the 2022 bear market. Yet the latter brought things to a head, primarily because a leaked balance sheet for Alameda and FTX revealed in November 2022 that, if you removed native token FTT from the equation, its liabilities greatly outweighed its assets. Cue a massive run on FTX, with customers figuratively stepping over each other in order to take their funds off the exchange.
This exodus was basically the death knell for FTX, with Binance initially suggesting a takeover of the embattled exchange before pulling out of the mooted deal a few days later. So on November 11, FTX was forced to file for chapter 11 bankruptcy, leaving its remaining customers short of around $16 billion in assets.
Sam Bankman-Fried Guilty On All Counts: What Happens Next?
The weeks and months that followed FTX’s demise only served to reveal just how brazen Sam Bankman-Fried and his fellow execs had been. Not only had Alameda been losing money on its heavily leveraged investments, but it had been using FTX customer funds in an attempt to cover losses.
This is what the US Department of Justice alleged when filing charges against Bankman-Fried in December 2022, and in early November 2023 a jury found the FTX founder guilty on all counts. As noted above, Bankman-Fried faces a possible maximum sentence of 110 years, although some legal experts believe he will receive less than this and may not spend the rest of his life in prison.
Of course, the bigger question is where this all leaves crypto. At the time, the collapse of FTX had severe knock-on effects on the cryptocurrency market, with the latter’s overall value dropping from roughly $1.1 trillion to $820 billion in the day’s following its failure. Yet its the longer term effects which are perhaps more important.
For one, regulatory bodies and lawmakers in the US have called for comprehensive cryptocurrency legislation to be introduced more quickly. Speaking at a hearing soon after FTX’s collapse, the chair of the CFTC urged Congress to act fast on such legislation, while a number of bills have been put forward in the US in the months that followed (e.g. the Lummis-Gillibrand Responsible Financial Innovation Act).
One of these, a bipartisan bill sponsored by representatives McHenry, Thompson, Hill and Johnson, would provide clarity on when a cryptocurrency should be considered a security and when a commodity, among other things. Yet it has faced opposition from some quarters of Congress, with Representative Maxine Waters arguing that it disregards “the views of the Administration, the Securities and Exchange Commission, and consumer and investor advocates.”
As such, Congress as a whole may end up pushing through more restrictive legislation, or may simply call for existing laws to be policed more vigorously when it comes to crypto. Either way, it could make life more difficult for cryptocurrency firms operating within the US and/or serving US customers, as already highlighted by the various actions the SEC has taken since FTX’s implosion.
Yet it’s clear that crypto will probably need some kind of regulatory rebirth in order to regain public trust. With the market still in a subdued state some 12 months after FTX’s collapse, it seems that the general public’s appetite for crypto remains somewhat depressed. So while some within the industry would potentially complain, the introduction of legislation that responds to FTX and all of its issues may provide the market with one of the shots in the arm it currently needs.
