03/12/2022

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What is the FTX scandal? How the celebrity-endorsed crypto giant collapsed into chaos

This photo illustration shows the logo of cryptocurrency FTX, reflected in an image of former chief executive Samuel Bankman-Fried, in Washington, DC, on November 13, 2022.

Just months ago, FTX appeared to be a major success story in the cryptocurrency world.

Not familiar with the name or the industry? Then let’s start at the beginning.

What does FTX stand for?

FTX is short for “Futures Exchange.”

What is a cryptocurrency?

It is money traded in a digital form. It is supposed to have “safeties” on it that keep it from being traded more than once, track it and secure it against duplication or hacking.

FTX is one of the biggest exchanges where trading those digital assets took place, and was touted by regulators and market watchers as one of the most transparent crypto operations.

What sparked the scandal?

Initially, the market believed the FTX implosion was the result of an old-fashioned bank run on the exchange’s reserves.

In a largely unregulated corner of the financial sector, much of the world is still learning how owning, trading and tracking cryptocurrencies will actually work for buyers, sellers and regulators.

However, as time as gone on and more facts have emerged, the story around the company has gotten much more complicated – and potentially criminal.

How did FTX unravel?

Here’s a rough timeline of what led to the bankruptcy:

Nov. 2: CoinDesk publishes a report that revealed Alameda Research – a sister company to FTX – had a balance sheet full of FTT, the cryptocurrency issued by FTX.

Nov. 6: Changpeng Zhao, the founder of Binance, said the cryptocurrency exchange would offload all of its remaining FTX tokens “due to recent revelations that have came to light.” FTT prices dropped as investors began to withdraw.

Nov. 8: Binance agrees to acquire FTX.

Nov. 9: Binance pulls out of its agreement to take over FTX.

Nov. 11: FTX files for bankruptcy. CEO and founder Sam Bankman-Fried, age 30, resigns.

Nov. 11: Reports emerge that FTX transferred $10 billion to Alameda, its sister company, sparking concern about what source of access top leaders had to the company’s finances.

Nov. 13: News organizations begin reporting that much of the money transferred out of FTX in its final hours has disappeared.

Nov. 14: Multiple regulators reportedly begin looking into criminal liabilities surrounding the company.

How big was the company?

It was one of the largest crypto exchanges and valued at an estimated $32 billionin January. You could find its name attached to an NBA stadium or in commercials with celebrities like Tom Brady and Larry David.

That’s all gone. After filing for bankruptcy last week, the crypto exchange has lost value, its CEO and much of its credibility.

Experts say FTX’s implosion could have ripple effects on the cryptocurrency industry at large.

“If corporations are behaving like exchanges and banks, they should be regulated as exchanges and banks, regardless of the fact that whether they’re dealing with dollars or bitcoins,” said Omid Malekan, an adjunct professor at Columbia Business School and crypto industry veteran and author.

Explaining the FTX bankruptcy filing

It all started earlier this month when digital currency news site CoinDesk revealed Almeda Research – a trading firm also founded by 30-year-old FTX founder Sam Bankman-Fried that conducts trades on FTX – was heavily dependent on FTT, the token issued by FTX.

“When the balance sheet was leaked, it was sort of like someone pulled the curtain and realized that the Wizard of Oz was not what we had thought,” Malekan said. “It broke the illusion that this was this very high-flying, professional, very successful operation run by these young geniuses.”

After the report was published, the crypto exchange Binance said it would liquidate its FTT holding. That kickstarted a downward spiral with FTT and other cryptocurrencies as investors began to pull out their money.

The Wall Street Journal reported that FTX lent billions of dollars of customer assets to Alameda to help fund risky bets

Rival cryptocurrency exchange Binance agreed to take over FTX on Nov. 8 but pulled out of its offer the following day due to “corporate due diligence” and “news reports regarding mishandled customer funds and alleged US agency investigations,” according to a statement on Twitter.

On Friday, FTX declared bankruptcy and Bankman-Fried resigned.

Reuters reports that at least $1 billion of customer funds are missing from FTX. The Securities and Exchange Commission and Justice Department are investigating the exchange, according to the Wall Street Journal.

Authorities in the Bahamas, where FTX was headquartered, also said they were investigating the exchange.

Legal experts say FTX’s use of customer money for purposes not clearly communicated could be the basis for fraud or embezzlement charges.

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This photo illustration shows the logo of cryptocurrency FTX, reflected in its website on a laptop screen in Washington, DC, on November 13, 2022.

This photo illustration shows the logo of cryptocurrency FTX, reflected in its website on a laptop screen in Washington, DC, on November 13, 2022.

How did this affect other currencies?

Faith in cryptocurrency is shaken after FTX’s bankruptcy filing.

Popular currencies bitcoin has fallen about 65% so far this year, while ether is down 68%.

But Malekan believes FTX’s bankruptcy won’t have “that bad of an impact” on the industry in the long run. He compared it to the Worldcom scandal from the early days of the internet, in which the telecommunications company went into bankruptcy following revelations of an $11 billion accounting fraud.

“Twenty years later, the internet is a fundamental part of our lives because it solves important problems,” Malekan said. “Ultimately, either the technology is beneficial and matures to a point where it actually starts to impact people in ways beyond speculation, or it doesn’t.”

FTX class action lawsuit

Bankman-Fried and a number of FTX’s celebrity endorsers now face a class action lawsuit from U.S. crypto investors.

Filed Tuesday in Miami, the lawsuit accuses FTX of “false representations and

deceptive conduct.”

“FTX’s fraudulent scheme was designed to take advantage of unsophisticated investors from across the country, who utilize mobile apps to make their investments,” the lawsuit alleges. “As a result, American consumers collectively sustained over $11 billion dollars in damages.”

Along with Bankman-Fried, the lawsuit names celebrities who appeared in FTX commercials as defendants, including Tom Brady, Gisele Bundchen, Stephen Curry, Larry David and Shaquille O’Neal.

FTX did not immediately respond to a request for comment.

What happens to FTX Arena in Miami?

FTX has also lost the naming rights to the arena where the Miami Heat plays.

The 19-year, $125 million sponsorship between FTX and Miami-Dade County agreement inked in 2021 has been terminated. A statement from Mayor Daniella Levine Cava said the county and the team would work together to find a new naming rights partner for the arena.

Formula One team Mercedes has also suspended its sponsorship deal with FTX.

A sign for the FTX Arena, where the Miami Heat basketball team plays, is illuminated on Nov. 12, 2022, in Miami. FTX filed for bankruptcy protection Friday, Nov. 11.

A sign for the FTX Arena, where the Miami Heat basketball team plays, is illuminated on Nov. 12, 2022, in Miami. FTX filed for bankruptcy protection Friday, Nov. 11.

What is Sam Bankman-Fried’s net worth?

Bankman-Fried, also referred to as SBF, is known for his wild hair, his large political contributions to Democrats, and – as of Friday – the collapse of FTX and his wealth.

The former FTX CEO had a net worth of $26 billion during a March peak and had been worth roughly $16 billion as recently as last week, according to Bloomberg. Now that his assets are worthless, his fortune has evaporated.

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You can follow USA TODAY reporter Bailey Schulz on Twitter @bailey_schulz and subscribe to our free Daily Money newsletter here for personal finance tips and business news every Monday through Friday.

This article originally appeared on USA TODAY: FTX scandal explained: Class action lawsuit, bankruptcy, and more