12 December 2022

FTX’s Collapse – What Happened? A Drama in Four Acts.

  • Articles
  • Compliance
  • Legal
  • Blockchain / Digital Assets

FTX sounded like the perfect American success story. A twentysomething philanthropic MIT graduate had managed in four years to create one of the largest and most trusted crypto exchange platforms.

FTX sounded like the perfect American success story. A twentysomething philanthropic MIT graduate had managed in four years to create one of the largest and most trusted crypto exchange platforms. Sam Bankman-Fried (“SBF”), who had been crowned as the "Emperor of crypto" by the New York Times and predicted to be “the world’s first trillionaire” is now the disgraced child of the crypto industry.

But what exactly happened? Let's look back at this stunning collapse whose unparallel magnitude has shaken the crypto planet.

1. From a Trivial Economic Dispute to a Systemic Liquidity Crisis

If you haven’t been following this four-act drama, that some have called a crypto’s “Lehman moment”, here is a quick reminder.

Before displaying the timeline of FTX’s downfall, it should be borne in mind that, in 2017, SBF founded Alameda Research, a quantitative cryptocurrency trading firm. This background element is anything but minor as this company played a major role in FTX’s fate.

  • Act 1: on November 2nd, 2022 a CoinDesk article sparked concern. It revealed that a large portion of Alameda Research’s balance sheet is concentrated in FTX’s token called FTT. This piece of information would not have been so alarming if FTT was a traditional share whose value was not that volatile. It became clear that the two firms’ fate were so intertwined that if the FTT’s value happened to plummet, FTX would also face severe difficulties.

  • Act 2: on November 6th, 2022, the CEO of Binance known as CZ set fire to the powder. He wrote a bombshell tweet by announcing that his company would sell on the market 500-million-dollar worth of FTT, which Binance had received as a counterpart of its equity investment a few months earlier. Investors follow suit and panic began to spread to the market, despite FTX's reassuring announcements regarding FTX’s financial robustness.

  • Act 3: on November 8th, what initially looked like an economic dispute between two competitors, turned into a profound liquidity crisis. The FTX platform halted all User-withdrawals from the platform, and it became obvious that FTX suffered severe liquidity problems.

    Binance positioned itself to save FTX by entering into a non-binding letter of intent to fully acquire FTX.com and help cover the liquidity crunch. However, the next day, Binance decided against completing the deal after discovering the abysmal 8-billion-dollar hole in FTX's accounts.
  • Final Act: on November 11th, FTX filed bankruptcy and sought Chapter 11 protection from the U.S. Bankruptcy Court for the District of Delaware. In a context that is already tense, this request did not fail to start an international fight over the company’s bankruptcy administration. Indeed, Bahamian liquidators who have taken control of a subsidiary of FTX in their Caribbean nation want to move the parent company’s liquidation to New York from Delaware, considering that SBF simply lacked authority to initiate the U.S. chapter 11 proceeding. A perfect cocktail to add a little more complexity to an already tricky situation.

The outcome of the bankruptcy proceedings is yet far from clear – but the first public statements made by the US administrator give little hope that users will be able to recover their funds without substantial loss, as unsecured creditors of a company facing a $8 billion shortfall.

If you wish to learn more about this episode that will leave an indelible mark in the crypto’s history, we invite you to read this detailed article or watch this video.

2. From Client to Creditor

Once FTX filed for Chapter 11 bankruptcy protection, the platform’ website was shut down. Trapped and powerless consumers who seek to access their accounts on the FTX platform are now presented with nothing but restructuring information. In addition to providing important information on the dates of the hearings or the list of the debtors, it also offers a direct link for consumers to submit a future claim. To date, the exchange platform expects more than one million individual creditors.

It should be stressed that the U.S. Bankruptcy Court for the District of Delaware has not yet set a deadline for filing proofs of claim against the debtors. However, for creditors who do not wish to monitor Kroll website - FTX’s claims agent - and wait for an electronic claim filling, it is possible to file and send a completed hard copy proof of claim form at the following address:

FTX Trading Ltd. Claims Processing Center
c/o Kroll Restructuring Administration LLC
850 3rd Avenue, Suite 412
Brooklyn, NY 11232

3. How MME Can Support?

The MME team is following the developments closely and collaborating with US and offshore council to efficiently structure the filing of claims in the bankruptcy proceedings. Do not hesitate if you need support.

For all FTX related questions, Anne-Lorinne Mognetti is our key point of contact.