The encyclopedia · Finance & Accounting · Financial decision · 2022
FTX was the world's second-largest crypto exchange — until $8B in customer funds vanished
Sam Bankman-Fried built FTX into a $32B exchange. In November 2022, a bank run revealed $8B in missing customer funds. FTX was bankrupt in days.
FTX · Alameda Research · 2022-11
What happened
FTX, founded by Sam Bankman-Fried in 2019, grew rapidly into the world's second-largest cryptocurrency exchange, valued at $32 billion at its peak. Bankman-Fried was celebrated as a genius and a philanthropist, and FTX attracted investment from major institutions and celebrities.
In November 2022, a CoinDesk report revealed that Alameda Research, Bankman-Fried's trading firm, held a large portion of its assets in FTT, FTX's own token. This triggered a bank run: customers rushed to withdraw funds, and FTX could not meet the demands. Within days, it emerged that approximately $8 billion in customer funds had been transferred to Alameda to cover its trading losses.
FTX filed for bankruptcy. Bankman-Fried was arrested, convicted of fraud and sentenced to 25 years in prison. The case became the largest cryptocurrency fraud in history and a cautionary tale about the dangers of unregulated exchanges, commingled funds and charismatic founders with no oversight.
Why it happened
- FTX commingled customer funds with Alameda Research's trading operations, using deposits to cover trading losses.
- There was no meaningful internal controls, board oversight or regulatory supervision.
- Bankman-Fried's public image as a genius philanthropist deterred investors and regulators from scrutinizing the business.
- A bank run triggered by a CoinDesk report exposed the missing $8B within days.
The lesson
An exchange that uses customer deposits as trading capital is an unlicensed bank with no capital requirements. Charisma is not a substitute for controls.
Aftermath
FTX filed for bankruptcy in November 2022. Bankman-Fried was convicted and sentenced to 25 years. The case prompted increased regulatory scrutiny of cryptocurrency exchanges worldwide and contributed to the passage of new crypto regulation in several jurisdictions.
Sources
- SEC — 'SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX', 13 December 2022
- FTX — Wikipedia (collapse, fraud, bankruptcy)
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