009 – The fall of FTX has been one of the most controversial and aggravating events in digital finance and the crypto world in recent years; leaving the bankruptcy of Goldman Sachs behind and positioning itself in first place. This case is crowned as a collapse of the cryptocurrency stock market that continues to affect the entire sector.
Cryptocurrency companies are very intertwined, investing in each other, buying tokens from each other, and lending tokens and capital to each other, which means that the FTX collapse could affect more companies.
But let’s start at the beginning, FTX, (cryptocurrency exchange house) derives from the Alameda Research company founded by Sam Bankman Fried in 2017, a prodigy boy, with a degree in Physics from MIT, who would later end up in the financial world. He meets, in that house of studies, Gary Wang, a graduate in Mathematics and Computer Science, with a career in the Google company and who would be the mind that would program FTX two years later. They later decide to include Caroline Ellison, a mathematician and CEO of Alameda. This trio completed the board of mathematical prodigies at the head of the company established in The Bahamas, Alameda Research.
Fraudulent practices began, such as the use of their clients’ money to finance Alameda investments, purchase of real estate, planes, parties and even political donations, all financed by FTX. How? Bankman-Fried instructed Wang to create a “secret” back door that would allow his Alameda trading firm to borrow $65 billion of FTX clients’ money without their permission. (This was reported to the Delaware bankruptcy court by FTX attorney Andrew Dietderich)
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FTX is not your typical company that fails. John Ray, who managed Enron’s bankruptcy and was named chief executive of FTX when it filed for Chapter 11, said he had found very little documentation of its finances and that existing documentation could not be trusted. He testified in the United States Bankruptcy Court that he had never seen a situation as chaotic as the one he was encountering at FTX.
This, like dominoes, began to collapse and triggered the downfall of many companies as a consequence.
“Many brokerage firms will disappear and go out of business,” venture capital firm Multicoin Capital told investors in a letter, explaining that it had invested too much money and trust in FTX.
Cryptocurrency lender BlockFi, which signed a deal to be bailed out by FTX when prices plunged last summer, halted withdrawals last November and is bracing for possible bankruptcy. BlockFi stated that it had “significant exposure” to failed company FTX and its investment fund, Alameda Research.
Industry experts believe that there will be more companies in trouble. Two restructuring advisers told DealBook they were closely watching what happens with Oxygen, an Alameda-backed decentralized finance lending platform. Oxygen’s token is OXY; its total market capitalization, from about $395 million in January, has declined to about $2.6 million.
Genesis Global Capital, one of the largest lenders in the crypto space, suspended new lending and withdrawals a few months ago. Genesis, which may have lost as much as $175 million in the FTX collapse, is having a hard time paying creditors who have called for its funds. A Genesis spokesman said its non-lending businesses were running smoothly and that it was “accumulating the necessary liquidity” to operate.
Genesis is linked with many other firms. Its parent, Digital Currency Group, owns the CoinDesk publication and the investment firm Grayscale, which is a major wall within cryptocurrencies, among other organizations.
The fall of FTX has shocked the market. But we cannot generalize that, due to this fact, there is or will not be security in the crypto world. The cryptocurrency industry has long struggled to convince regulators, investors, and common customers that it is trustworthy, achieving the veracity of its processes through tangible facts and earning the trust of the majority.