FTX: The collapse of a crypto empire

(i) What is FTX?

FTX is a cryptocurrency exchange since 2019. The company had existed in Cyprus since 2015 under the name K-DNA Financial Services. FTX was founded by Sam Bankman-Fried, who is notably known in the financial world for creating Alameda Research in 2017, a trading company offering mathematical analysis of the Forex market. FTX EU Ltd was until recently registered under n˚335683 – license n˚273/15 with CySEC. 

FTX was quickly awarded the status of the world’s second largest exchange in the cryptocurrency market, after its competitor Binance. Incidentally, Binance, through its CEO Changpeng Zhao, invested in FTX from its inception by buying about 20% of its shares. This has undoubtedly influenced the various players in Forex investment to consider FTX as one of the market leaders. 

(ii) The cause of a bank run?

For several weeks, the company has been under the microscope of various international organizations.

∆ The media

It was after a journalistic investigation by Bloomberg and then CoinDesk that the alert was launched. According to their investigations, the trading company Alameda Research, founded in 2017 by Sam Bankman-Fried, would hold a substantial portion of its assets in FTT, the FTX cryptocurrency. This means that Alameda is not relying on independent assets such as fiat currency or other cryptocurrencies, but on the crypto of a related party to generate profit and secure an economic foundation. This company-to-company relationship is not ethical, but also not supervised, since the crypto market still lacks a regulatory framework. 

∆ Financial market authorities

• CySEC decided and then announced on November 11 the suspension of FTX’s CIF license. This means that FTX can no longer act as a Cyprus-based investment firm. The reason for this decision is based on two elements: firstly, the questioning of the managerial capacities of the management team. Secondly, FTX’s potential failure to comply with the conditions of authorization for the safeguarding of its clients’ assets. 

• FTX, along with its subsidiaries FTX.US and Alameda Research, announced their bankruptcy in the United States on November 11. This opened the door to an investigation by the U.S. Attorney’s Office for the Southern District of New York. At the same time, the Securities Exchange Commission (SEC) has reportedly already begun investigations against FTX, FTX.US and Alameda Research for possible violations in the trading of financial assets.

• The Royal Bahamas Police Force also interviewed Sam Bankman-Fried on November 12 as part of an investigation into whether FTX’s collapse was the result of criminal conduct. 

∆ FTX users

Individuals who invested in the FTX exchange found themselves in an uncomfortable position considering the revelations made by the media. The situation was not helped by the very public thoughts of other crypto market players. One of the reasons that initiated the general movement of a banking panic was the announcement by the market leader Binance to sell all its shares and positions with FTX. As a result, the value of FTX’s token, FTT, dropped precipitously, prompting individuals to withdraw their investments from the exchange as quickly as possible. This is what is known as a bank run: a paradoxical phenomenon where, in fear of a financial institution’s insolvency, its users withdraw their deposits in a hurry, creating insolvency. Many FTX users now find themselves in a victim position in view of their losses.

(iii) Crypto: what now?

Scamming schemes are appearing with increasing regularity when it comes to dematerialized currency investments and transactions. It’s clear that we need a regulatory framework, as the current chaos in the crypto-currency market is jeopardizing its viability. Investor confidence is fractured, putting the survival of crypto at risk. 

Market leader Binance, which for some time considered the buyout and the possibility of a bailout of FTX, finally retracted, considering that the damage was too great.

As forex and financial dispute resolution attorneys, we work to advance the regulations that should govern crypto investing. If you feel or have evidence that you have been defrauded by a broker, you can contact us.

Disclaimer:

The Financial Fraud Lawyers network aims to inform private investors (traders) of potential malpractices by Forex and CFD brokers. Our mission is to assist and protect traders when they encounter brokerage practices that go against their interests. 

Our articles are intended to warn, share and inform the public about the legal risks of Forex and its players. Trading financial products and CFDs as well as investing on online platforms carry legal risks. 

The article was written in good faith, based on public information and client testimonials valid at the time of publication. Our articles concern the protection of the interests of individuals on online investment platforms and are published in accordance with our right to inform the public about our activity. This article is not to be considered legal advice.