Could the implosion of the crypto exchange FTX trigger a wider meltdown in the world of digital currencies?
In only a matter of days, the world‚Äôs second largest digital currency exchange collapsed, and its owner ‚Äď the so-called ‚ÄėKing of Crypto‚Äô ‚Äď lost billions of dollars overnight‚Ä¶
‚ÄúCrypto Armageddon is here.‚ÄĚYoutuber Coffeezilla
30 year old Sam Bankman-Fried was the crypto-industry‚Äôs poster boy‚Ä¶
‚ÄúJust a few months ago, Sam Bankman-Fried ‚Äď or SBF ‚Äď was on the cover of Fortune magazine. He was hailed as the next Warren Buffet. His company, FTX, was a Goliath in the crypto world.‚ÄĚCNN
FTX was a crypto currency exchange which worked just like a foreign trading site. People bought crypto currencies like Bitcoin and ether with dollars, pounds and yen. They could also use FTX to deposit their digital earnings like an online bank. FTX was huge: it was valued at $32 billion and had over 1.2 million users.¬†
The problems began last week when the press got hold of the questionable financial dealings of Alameda Research, a trading firm closely linked with FTX which is also owned by Sam Bankman-Fried.
The leaked balance sheet showed that rather than keeping investor‚Äôs funds safe, FTX was actually lending vast sums to Alameda Research for risky crypto trading.¬†
Even worse, the assets that the FTX exchange and Alameda Research claimed they had to back investor‚Äôs deposits were actually made up of a cryptocurrency called FTT ‚Äď a currency which Sam Bankman-Fried created himself‚Ä¶¬†
Suddenly it became clear that the FTX exchange looked less like a respectable trading platform with billions backing it, and more like an old-fashioned Ponzi scheme.
When investors caught wind they began frantically withdrawing their money from FTX and a run on the exchange began:
‚ÄúReuters points to some analytics that shows hundreds of millions being withdrawn from FTX in one day.‚ÄĚCNBC
$5.2 billion was taken out in the first 36 hours.¬†
At the same time, the value of the FTT cryptocoin which Sam Bankman-Fried‚Äôs system relied on plummeted by 72%. As the value of the FTT coin fell, so did the value of FTX‚Äôs assets that were tied to it; this meant it quickly ran out of money to pay people‚Äôs withdrawal requests.¬†
Clients found they were unable to access their money‚Ä¶
‚ÄúThings are very dark today‚Ä¶ I might have lost tens of thousands of dollars.‚ÄĚYoutuber The Baguette Investor
Soon after, FTX was declared bankrupt and Sam Bankman-Fried resigned as CEO.¬†
At the start of last week, Sam Bankman-Fried was worth just over $16 billion. By the end, his empire had been almost entirely wiped out. It‚Äôs been described as history‚Äôs greatest-ever destruction of wealth.
It‚Äôs hard to overstate just how big of a player he was. Thanks to his FTX exchange he officially became a billionaire in 2021. This let him into the exclusive world of power and celebrity.
He appeared in Vogue magazine with the supermodel Gisele, spent millions of dollars on an elaborate Super Bowl advert with comedian Larry David‚Ä¶
‚ÄúLike I was saying, it‚Äôs FTX‚Ä¶ It‚Äôs a safe and easy way to get into crypto‚Ä¶‚ÄĚ
‚Äú‚Ä¶I don‚Äôt think so. And I‚Äôm never wrong about this stuff, ever.‚ÄĚLarry David, Super Bowl, 2022
And even hung out with Katy Perry and Orlando Bloom.¬†
But more than that: SBF was a big political donor. He gave $40 million to parties in this years‚Äô US midterms ‚Äď most of that went to the Democrats. In 2020, he donated more than five million dollars to Joe Biden‚Äôs presidential campaign.
Earlier this year he shared a stage at a major international Crypto event in the Bahamas with former UK prime minister Tony Blair and ex-US president Bill Clinton.
What repercussions will his fall from grace have at the heart of American politics?
In a long series of tweets after the collapse of FTX, Sam Bankman-Fried said he was sorry, but this won‚Äôt be enough to avoid serious consequences.
Soon after he lost his billions, Sam Bankman-Fried flew to the Bahamas in his private jet. At the same time it was reported that $473 million in FTX crypto assets have been stolen from the company‚Äôs accounts.
‚ÄúIt‚Äôs a lot of complicated, murky financial engineering which does not look good for Sam Bankman-Fried.‚ÄĚ
American financial regulators are investigating FTX‚Äôs collapse and SBF is facing the very real possibility of criminal charges.¬†
Right now, no one knows where he is. The authorities are worried he‚Äôs considering a dash to Dubai ‚Äď a place which has no extradition treaty with the West.
Some industry insiders have said the company‚Äôs downfall has triggered a ‚ÄúLehman Brothers moment,‚ÄĚ for crypto. They‚Äôre referring to the 2008 collapse of the investment bank which led to a global financial crisis.¬†
The worry is FTX‚Äôs collapse will lead to the downfall of the entire crypto ecosystem. The prices of major digital currencies like Bitcoin fell dramatically in the immediate aftermath and are struggling to restabilize. The biggest exchange, Binance, has been found to be similarly reliant on its own cryptocoin‚Ä¶¬†
Faith in the whole world of crypto has been shaken and Investors are angry:¬†
‚ÄúYou‚Äôve done damage to this industry, you‚Äôve done damage to the people in this industry. And the account holders who trusted you. So enough is enough, don‚Äôt let a charade go on.‚ÄĚ
If this could happen to the second biggest exchange, what‚Äôs stopping other major crypto operations from failing too?
This episode was written and mixed by Rebecca Moore.