It is over. ftx, once the third-largest cryptocurrency-trading platform and crown jewel in the empire of Sam Bankman-Fried, the firm’s enigmatic founder, has filed for bankruptcy. Mr Bankman-Fried, who was an advocate for better crypto regulation, mixed with the high and mighty in Washington and had long been perceived as one of the most trustworthy people in an untrustworthy industry, has resigned as its chief executive and is reportedly being investigated by American regulators. He is also winding down his proprietary trading firm, Alameda, and his American exchange, ftx.us. A week ago Mr Bankman-Fried was estimated to be worth $15.6bn, thanks to the success of these businesses. Now all are worthless. His empire, wealth and reputation have been eviscerated.
It was only on November 2nd that CoinDesk, a news website, published Alameda’s balance-sheet, revealing the incestuous nature of its relationship with ftx. It later emerged the exchange had lent $10bn of the $16bn of crypto-assets customers had entrusted with it to Alameda, which the trading firm is alleged to have used to make risky bets. The fallout from these revelations included a nosedive in the value of ftt, a token issued by ftx. After this slump, Changpeng Zhao, the boss of Binance, a rival exchange, announced his firm would liquidate its holdings of ftt, precipitating a run on ftx. Binance then offered to ride to the rescue, only to back out after a look at ftx’s books.
The pace of events accelerated from there. Mr Bankman-Fried called up investors who had bought stakes in ftx to beg for a bail-out. Sequoia, a venture-capital firm, wrote down the value of its investments to zero. America’s Securities and Exchange Commission and the Department of Justice are reported to be investigating what went on. The Securities Commission in the Bahamas, where ftx is based, froze the firm’s assets on November 10th. The question of whether ftx could be saved was answered with a bankruptcy filing in America the next morning.
Now that ftx’s demise is total, what remains are big and difficult questions about how this could have happened, what can be salvaged and the size of the reverberations. Some are already being felt in cryptoland. The prices of digital assets are sliding as investors panic about who is exposed to the blow-up. BlockFi, a business Mr Bankman-Fried swooped in to save when prices crashed in the summer, has halted customer withdrawals.
Given Mr Bankman-Fried’s outsized influence in philanthropy and politics, there will be wider reverberations. Over the coming weeks, participants in the drama will seek to justify their actions. Mr Bankman-Fried himself intends to have a say: he has tweeted he will write a “play-by-play” account of what happened. But though some of the financial assets involved in the events are wrapped in unfamiliar jargon, with “exchange tokens” like ftt at the heart of the problem, the economics of what went wrong do not look entirely novel. After walking away from a deal, Mr Zhao laid the blame on too much leverage and the fact that ftx had lent out customer assets in exchange for collateral made up of assets the exchange had itself issued.
Leverage, risky bets, dodgy collateral—this is stuff familiar from the great financial scandals of old. John J. Ray iii, a lawyer brought in to clean up after Enron, an energy-trading firm, went bust in 2001, has been installed as the new boss of ftx. Mr Bankman-Fried has hired Martin Flumenbaum, who represented Michael Milken, the “junk-bond king” imprisoned for securities fraud, as his lawyer. ftx is over. The fight about what that means has just begun. ■
