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The Fall of FTX: An End to Crypto?

Nearing the end of 2022, two renowned entities would incur downward shifts and massive losses in an ironic parallel, resulting from management failures. [14] [17] Whereas Elon Musk’s Twitter faced extensive layoffs, Sam Bankman-Fried’s FTX crypto exchange filed for bankruptcy in early November following a chain of misconduct. [14] [17] As reported in a recent survey by Grayscale and The Harris Poll, most Americans would agree that “cryptocurrency is the future of finance.” [5] Yet for the unknowing few, many questions remained unanswered: What is all the talk surrounding “cryptocurrency”, “FTX, “Bitcoin'' and “bankruptcy”? Where did everything start, and how did it all end?

Cryptocurrency is a collaborative online exchange system in which secure encryptions are used to produce and distribute currency units. [18] Since the system is decentralized, each transaction is verified separately, and its data is stored in a block without central authority figures. [18] The amalgamation of crypto data blocks forms a Blockchain, a public ledger of all transactions executed. [18] When a person sends another person cryptocurrency, a transaction is validated through miners prior to the Blockchain. The Mining Process confirms the currency’s rightful ownership and amount, most often entailing two tasks: Proof of Work, which ensures the task’s performance, and Proof of Stake, which requires the miner to show how much of the currency they possess within the system. [18]

Along with NFTs (non-fungible tokens), cryptocurrencies exploded in recognition and value in 2021. [7] Surprisingly however, the first successful implementation of cryptocurrency, Bitcoin, was introduced in 2008-09 by Nakamoto. [18] Bitcoin’s launch would inspire countless others to follow suit, Sam Bankman-Fried being the most prominent and promising figure in the industry. [8] [18] After three years of proprietary trading for Jane Street Capital, Bankman-Fried decided to venture on his own into crypto trade, founding Alameda Research in 2017. [15] He soon co-founded FTX, making Binance, another crypto trading platform led by CEO Changpeng Zhao, become its first investor. [15] In 2020, Bankman-Fried would further partner with FTX US, since FTX wasn’t available to Americans. [13] Before the downfall of FTX, Bankman-Fried was regarded as the "White Knight'' of the industry after saving two platforms from bankruptcy, his net worth having peaked at $26 billion in March 2022. [8] [12] However, when his legacy came crashing down in November, Bankman-Fried lost over 94% of his net worth in what Bloomberg regarded as "one of history's greatest-ever destructions of wealth." [11] What happened exactly?

Simply put, it was a misuse of customers’ funds. [10] On November 2, CoinDesk, a media outlet in crypto trade, reported Alameda’s troubling balance sheet with billion dollars worth of FTT, FTX’s cryptocurrency. [1] [14] Despite claiming FTX and Alameda Research are "wholly separate entities", Bankman-Fried kept the two unusually linked. Instead of crediting US Dollars as FTTs, he transferred FTX investments to Alameda and vastly withheld them. [10] In turn, the users’ holdings experienced a significant loss in value, were gambled away and turned illiquid - impossible to sell without loss. [10]

On November 6, CEO Changpeng Zhao announced his intentions of clearing out all of Binance’s FTT due to "revelations" made by CoinDesk. [14] As a record $5 billion had been withdrawn from FTX, FTT’s value plummeted such that it sent the crypto firm straight into a liquidity crunch - failure to finance transactions. [10] [14] This partially goes to show the power of cryptocurrencies, immensely influencing the U.S. economy via Dollar bypass and deprivation of direct financial input. [4] In fear of a market crash, Zhao made Bankman-Fried an offer on November 8 to merge FTX with Binance, thus resolving the crisis. [14] Not a day later, Binance decided against the acquisition after commissioning its investigation. [14] On November 11, FTX filed bankruptcy for FTX, FTX.US, and Alameda. Bankman-Fried was owing users billions of dollars while under criminal investigation in the Bahamas. [14] As of December 12, Bahamian authorities have arrested Bankman-Fried at the request of the U.S. government on eight total charges, including wire fraud and conspiracy to defraud investors. [14] [19]

FTX’s fall from grace sent ripples across the U.S. trading market, causing substantial price drops in Bitcoin, Ethereum, and other significant cryptocurrencies. [14] Nevertheless, does the fiasco mark a definite end to crypto trade? The answer remains a strong NO. The Asia Pacific policy lead of Ripple, a notable crypto trade platform, states that the fall of FTX is "incredibly damaging," yet the industry will persist and undergo further growth in the foreseeable future. [3] After all, cryptocurrencies not only allow for global, efficient, and affordable value exchange, but they also make it possible to tokenize physical assets; the demand for crypto will only rise with such potential. [6] Following the collapse of FTX, legislators are intent on re-evaluating current frameworks to improve cryptocurrency regulation worldwide. [3] Moreover, Blockchain technology is constantly evolving in both efficiency and transparency. [9] [16] The statement is evident by Ethereum’s shift to proof of stake, which cuts down on energy-use, and Bitcoin’s proof of work growing more battle-tested and reliable. [9] [16] To avoid volatility, users are looking forward to a more special kind of crypto called stablecoins, created to maintain value with the U.S. dollar. [2] Undoubtedly, the trust lost from FTX’s mismanagement and misuse of funds will take years to recoup, but the road to innovation remains straight ahead for cryptocurrency and trade, the success of Blockchain more imminent than ever. [16]

Works Cited

1. Allison, Ian. “Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet.” CoinDesk, 9 Nov. 2022, coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet.

2. Belsie, Laurent. “Why FTX Collapse Doesn’t Mean an End for Cryptocurrency.” The Christian Science Monitor, 7 Dec. 2022, csmonitor.com/Business/2022/1129/Why-FTX-collapse-doesn-t-mean-an-end-for-cryptocurrency.

3. Coghlan, Jesse. “FTX Fall Was ‘Incredibly Damaging,’ Crypto Must Foster Real Utility — Ripple Policy Lead.” Cointelegraph, 28 Nov. 2022, cointelegraph.com/news/ftx-fall-was-incredibly-damaging-crypto-must-foster-real-utility-ripple-policy-lead.

4. Cryptocurrency Card Team. “Economic Impacts of Cryptocurrency in the United States.” Cryptocurrency Debit Card Reviews, 18 June 2020, cryptocurrencycard.org/economic-impacts-of-cryptocurrency-in-the-united-states.

5. Grayscale Investments. “Grayscale Investments® and the Harris Poll Survey Reveals That Democrats and Republicans Agree Cryptocurrency Is the Future of Finance.” GlobeNewswire News Room, 1 Nov. 2022, globenewswire.com/news-release/2022/11/01/2545507/0/en/Grayscale-Investments-and-The-Harris-Poll-Survey-Reveals-that-Democrats-and-Republicans-Agree-Cryptocurrency-is-the-Future-of-Finance.html.

6. Gronager, Michael. “Why The Future of Crypto Remains Promising Despite FTX’s Collapse.” The National, 23 Dec. 2022, www.thenationalnews.com/business/money/2022/12/23/why-the-future-of-crypto-remains-promising-despite-ftxs-collapse.

7. Hayward, Andrew. “The Biggest Crypto Story of 2021: NFT Boom.” Decrypt, 23 Dec. 2021, decrypt.co/88636/biggest-crypto-story-2021-nft-boom.

8. Lang, Hannah. “Sam Bankman-Fried’s Sudden Turn From White Knight to Washout.” Reuters, 12 Nov. 2022, reuters.com/technology/sam-bankman-frieds-sudden-turn-white-knight-washout-2022-11-12.

9. Locke, Taylor. “Ethereum Completes Ambitious Merge Upgrade to Proof-of-stake Model That Will Cut Energy Use 99%.” Fortune, 15 Sept. 2022, fortune.com/crypto/2022/09/15/ethereum-completes-merge-upgrade-shifts-to-proof-of-stake.

10. Morris, David. “FTX’s Collapse Was a Crime, Not an Accident.” CoinDesk, 2 Dec. 2022, coindesk.com/layer2/2022/11/30/ftxs-collapse-was-a-crime-not-an-accident.

11. Morrow, Allison. “Crypto’s White Knight Lost 94% of His Wealth in a Single Day.” CNN, 10 Nov. 2022, edition.cnn.com/2022/11/09/business/sam-bankman-fried-wealth-ftx-ctrp/index.html.

12. Morrow, Allison. “In Less Than a Week, Sam Bankman-Fried’s $16 Billion Fortune Evaporated.” CNN, 12 Nov. 2022, edition.cnn.com/2022/11/11/business/sbf-wealth/index.html.

13. NextAdvisor. “FTX.US Review 2022: A Crypto Exchange With NFTs, but Limited Coins.” NextAdvisor With TIME, 2 May 2022, time.com/nextadvisor/investing/cryptocurrency/ftx-review.

14. Ramirez, Dalia. “FTX Crash: Timeline, Fallout and What Investors Should Know.” NerdWallet, 28 Nov. 2022, nerdwallet.com/article/investing/ftx-crash.

15. Reuters. “Factbox: Sam Bankman-Fried: The Crypto Mogul Whose Empire Came Crashing Down.” Reuters, 11 Nov. 2022, reuters.com/business/finance/sam-bankman-fried-crypto-mogul-whose-empire-came-crashing-down-2022-11-11.

16. Roberts, Jeff John. “The ‘End of Crypto’? Not so Fast.” Fortune, 22 Nov. 2022, fortune.com/crypto/2022/11/22/the-end-of-crypto-not-so-fast.

17. Southern, Matt. “Elon Musk’s Twitter Takeover: A Timeline of Events.” Search Engine Journal, 5 Dec. 2022, searchenginejournal.com/elon-musks-twitter-takeover-a-timeline-of-events/470927.

18. U. Mukhopadhyay, A. Skjellum, O. Hambolu, J. Oakley, L. Yu, and R. Brooks, "A brief survey of Cryptocurrency systems," 2016 14th Annual Conference on Privacy, Security and Trust (PST), 2016, pp. 745-752, doi: 10.1109/PST.2016.7906988.

19. “Former FTX CEO Bankman-Fried Arrested in Bahamas After U.S. Files Charges.” Reuters, 13 Dec. 2022, reuters.com/world/us/former-ftx-ceo-bankman-fried-arrested-bahamas-official-2022-12-12.