3 - 5 minute read
The collapse of the cryptocurrency exchange FTX in November 2022 caused a crisis of confidence in the industry and raised concerns about the safety of customer funds. Rumors of problems at the exchange surfaced after rival Binance refused to bail it out, citing “corporate due diligence” and reports of “mishandled customer funds.” This led to a run on FTX, with investors trying to withdraw their money, which in turn led to the company’s insolvency and filing for bankruptcy. It was later revealed that at least $8 billion of customers’ money had disappeared.
Investigation and Guilty Pleas
The collapse of FTX has led to an ongoing investigation by the US Justice Department, with former Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang pleading guilty to federal fraud charges related to the collapse of the exchange. The US Securities and Exchanges Commission (SEC) has also charged Ellison and Wang for their roles in a “multiyear scheme to defraud equity investors in FTX,” and is investigating other potential securities law violations in relation to the company.
Arrest and Extradition of Sam Bankman-Fried
FTX founder Sam Bankman-Fried was arrested in the Bahamas in December 2022 at the request of US legal authorities for alleged “financial offences” under US and Bahamian laws connected to the exchange and the hedge fund Alameda Research, which he founded in 2017. He has been extradited to the US and is expected to appear in a New York courtroom soon. It is alleged that Bankman-Fried used FTX’s funds as collateral for loans for other purposes and that he was not aware of potentially fraudulent activities at the company. He has gone on an apology tour in various media outlets, deflecting blame onto Caroline Ellison, the former CEO of Alameda Research.
The media has been criticized for its softball coverage of Bankman-Fried and its failure to adequately scrutinize his businesses while they were still operational. Credulous or ignorant interviewers allowed Bankman-Fried to deflect blame and pull the wool over their eyes, despite the fact that he had reportedly been treating FTX as a piggy bank and possibly even playing the hedge fund market with investors’ money.
Impact on Binance and the Cryptocurrency Industry
The collapse of FTX and the arrest of Bankman-Fried have had a ripple effect on Binance, FTX’s one-time rival. The company has seen $6 billion withdrawn from the exchange from Monday to Wednesday, with $1.14 billion withdrawn on Tuesday alone. International accounting firm Mazars has suspended its work verifying Binance’s “proof of reserves,” leading the company to seek auditing services from other firms, including the “Big Four” accounting firms, but so far without success. Binance also halted withdrawals of the stablecoin USDC for around eight hours on Tuesday, causing concerns among investors and reminding them of the run-up to FTX’s implosion.
The collapse of FTX and lender BlockFi have also revealed the close connections between many of the biggest players in the cryptocurrency industry. The arrest of Bankman-Fried has raised questions about the regulation of cryptocurrency and the role of tax havens in facilitating financial crime. It remains to be seen how the investigation and legal proceedings will play out and what impact they will have on the industry as a whole.
The media has also faced criticism for its coverage of Bankman-Fried and its failure to adequately scrutinize his businesses while they were still operational. Many interviewers seemed hypnotized by the tech wunderkind and his promises to give away his wealth to good causes, rather than asking tough questions about the potential fraudulent activities at his companies. The poor reporting and lack of scrutiny may have contributed to the collapse of FTX and the loss of billions of dollars for investors.
As the investigation into FTX and the legal proceedings against Bankman-Fried, Ellison, and Wang continue, it is important for the media and the public to stay vigilant and demand transparency and accountability from those involved in the cryptocurrency industry. The events surrounding the collapse of FTX serve as a reminder of the risks and potential pitfalls of investing in cryptocurrency and the need for strong regulation to protect consumers and investors.