Definition of FTX Exchange
FTX Exchange was a cryptocurrency exchange founded by Sam Bankman-Fried and Gary Wang in 2017 and quickly grew to become one of the world’s largest crypto exchanges.
In 2021, FTX had over a million users and an average daily trading volume of ten billion US dollars [1]. The company was valued at approximately 18 billion dollars in 2021 [2] and even 32 billion dollars in 2022 [3]. The exchange’s headquarters were initially in Hong Kong but were relocated to the Bahamas in 2021 [4].
On November 11, 2022, FTX Exchange filed for bankruptcy [5].
Business Models of FTX Exchange
Cryptocurrency Trading
FTX allowed users to buy, sell, and trade various cryptocurrencies, including popular ones like Bitcoin, Ethereum, and many others.
Derivatives Market
FTX was known for its wide range of crypto derivatives, offering not only spot trading but also futures, options, and other financial instruments related to cryptocurrencies.
Tokenized Assets
FTX offered tokens that mirrored the price of real-world assets, such as stocks, commodities, or Exchange-Traded Funds (ETFs).
Leverage Trading
FTX allowed traders to trade with leverage, meaning they could open positions with a higher capital commitment than their own.
Staking and Savings
FTX also provided staking services and the opportunity to earn interest on cryptocurrencies.
FTX’s Revenue
The company generated revenue from trading fees, financing costs for leveraged positions, fees for derivative trading, and other services.
The Scandal – Embezzlement of Customer Funds
Charges
According to reports and statements from former employees, FTX allegedly embezzled customer deposits worth billions of dollars through transfers to its affiliated crypto trading company, Alameda Research. Shortly after announcing FTX’s bankruptcy, nearly one billion US dollars were reportedly stolen from the crypto exchange in “unauthorized transactions.” It is highly likely that customer funds in the billions have been lost. FTX is said to owe its creditors around 8 billion dollars. Two billion of this amount is said to have been transferred to the crypto hedge fund Alameda Research, controlled by Sam Bankman-Fried [6].
In addition to Sam Bankman-Fried as the CEO of FTX, Caroline Ellison as the CEO of Alameda Research and Gary Wang as the Chief Technology Officer of FTX were charged with various fraud offenses in New York. Ellison and Wang pleaded guilty to several charges in December 2022 [3].
According to federal prosecutors, Sam Bankman-Fried is also alleged to have diverted over 100 million dollars from his customers to support both Democratic and Republican candidates in the 2022 U.S. midterm elections. He is also said to have instructed two FTX executives to obscure the source of the funds and bypass contribution limits. This was allegedly done to engage in lobbying and support laws and regulations that he believed would facilitate FTX’s growth [7].
Extraordinary expenditures by FTX, as per court documents, include [3]:
- 35 properties in the Bahamas valued at 256.3 million USD.
- Expenses for luxury hotels and accommodations in the Bahamas totaling 15.4 million USD in nine months.
- Advertising budget of approximately 2.5 million USD.
- Purchase of a yacht by Alameda Research’s Co-CEO, John Samuel Trabucco, for about 2.5 million USD
Judgment
A final judgment is expected to be announced in mid-November 2023. We will keep you updated and update the blog post accordingly when there is new information to report [2].
What can we learn from this?
We can learn that with centralized entities, regardless of how large and professional they may appear, especially in investments and asset storage, we should always exercise caution. It is advisable to store your own Bitcoin on a hardware wallet [read more].
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Sources
[1] FTX had 1 million users and a 10 billion trading volume in 2021 – https://financefwd.com/de/ftx-krypto-boerse/ [accessed on 30.10.2023]
[2] FTX valued at 18 billion dollars in 2021 – https://www.wsj.com/articles/crypto-exchange-ftx-valued-at-18-billion-in-funding-round-11626800455 [accessed on 30.10.2023]
[3] Valuation of 32 billion US dollars – https://www.zeit.de/wirtschaft/geldanlage/2022-11/ftx-kryptowaehrungen-usa-senat-bitcoin?utm_referrer=https%3A%2F%2Fwww.google.de%2F
[4] Headquarters in the Bahamas, millions in real estate and luxury goods – https://www.businessinsider.de/wirtschaft/international-business/so-verprasste-sam-bankman-fried-das-geld-von-ftx/#:~:text=Aus%20den%20im%20Dezember%20vergangenen,etwa%20243%20Millionen%20Euro)%20besitzt.
[5] FTX bankruptcy on November 11, 2022 – https://www.forbes.com/advisor/de/geldanlage/krypto/was-passierte-mit-kryptoboerse-ftx/ [accessed on 30.10.2023]
[6] According to the charges, FTX owes 8 billion USD to creditors, with 2 billion USD transferred to the crypto hedge fund Alameda Research – https://www.nzz.ch/finanzen/ftx-prozess-ich-habe-niemanden-betrogen-und-keine-kundengelder-gestohlen-sam-bankman-fried-sagt-vor-der-jury-aus-ld.1762532 [accessed on 30.10.2023]
[7] Alleged diversion of 100 million USD for political influence – https://www.faz.net/aktuell/wirtschaft/bankman-fried-nutzte-gestohlene-ftx-kundengelder-fuer-politische-einflussnahme-19105224.html [article from 15.08.2023, accessed on 30.10.2023]