Collapse Of FTX Cryptocurrency Exchange Prompts Investigations

On November 11, 2022, Bahamas-based FTX, one of the world’s largest cryptocurrency exchanges, filed for bankruptcy and its founder, Sam Bankman-Fried, stepped down as CEO.  This was a stunning turn of events for a company valued at $32 billion earlier this year and whose logo appeared on everything from Formula 1 racecars to the Miami Heat’s arena.  It was also a shocking fall from grace for Bankman-Fried, the world’s richest 29-year-old, who made Fortune’s 40 Under 40 list in 2021, became one of the Democratic Party’s top donors, and made “lavish donations” to charities. 

Numerous reports have been written about what went wrong, with Alameda Research (“Alameda”), Bankman-Fried’s cryptocurrency trading firm, playing a starring role in the collapse.  According to CNBC, at some point in the last two years, Alameda reportedly began borrowing money for venture investments, among other things.  Then, six months ago, the crypto market experienced a $2 trillion crash, and “a wave of titans in the crypto sector folded as depressed token prices sucked liquidity out of the market.”  Just like the 2008 financial crisis, the problem was that everyone was borrowing from each other, CNBC explained.  Bankman-Fried tried to bail out some of the failing crypto firms, but many filed bankruptcy.  Now Alameda’s lenders wanted their money back, but Alameda didn’t have it because it was tied up in venture investments.  To meet Alameda’s debt obligations, FTX allegedly borrowed about $10 billion from its customer deposits, and tried to cover it by denoting assets in two crypto tokens: FTX’s own token, FTT, and Serum, another token created and promoted by FTX and Alameda.

This worked for a while, but things further unraveled when CoinDesk reported on November 2, 2022 that Alameda’s assets were held in FTT (FTX’s illiquid tokens), raising questions about Alameda’s solvency and FTX’s financials.  Binance, the world’s largest cryptocurrency exchange (which Bankman-Fried publicly criticized over the summer), decided to liquidate its remaining FTT tokens on November 6, 2022, scaring investors and prompting them to pull approximately $5 billion out of FTX that day.  Two days later, Binance agreed to buy the Company, but a day later announced that it would not go through with the deal after “due diligence.”

Unsurprisingly, the U.S. Securities and Exchange Commission (“SEC”) and the Department of Justice are reportedly investigating FTX.  According to the Wall Street Journal, the SEC is focused on FTX’s U.S. subsidiary, FTX.US, and believes that some of its assets might constitute securities and, if so, should have been registered with the SEC before being sold to investors. 

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About Katherine M. Lenahan

Katherine M. Lenahan is a Partner in the New York office of Faruqi & Faruqi, LLP and focuses her practice on securities litigation.

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