After the shock, the moment to understand what happened and to assign responsibility has come.
Sam Bankman-Fried, 30, the former king of cryptocurrencies, was questioned on Nov. 12 by the Bahamian police and regulators, the day after his company, FTX, filed for Chapter 11 bankruptcy, according to Bloomberg News.
Bankman-Fried, who lives in the Bahamas, resigned on Nov. 11. He was replaced as CEO by John J. Ray, known for being the liquidator of disgraced brokerage Enron.
This interview by the police does not mean that Bankman-Fried is being charged or that he will be arrested. Three U.S. regulators, the SEC, the CFTC and the Department of Justice have also opened investigations into FTX.
There have been rumors that Bankman-Fried had been arrested or that he was trying to flee to Dubai or Argentina.
But the former crypto wunderkind denied this speculation in a text message to Reuters on Nov. 12, saying he was still in the Bahamas. Reuters asked him specifically in a text message whether he had flown to Argentina, and he responded: "Nope.”
'Abnormalities'
Hundreds of millions in cryptocurrencies mysteriously flowed out of both FTX’s international and U.S. exchanges, blockchain securities firms say.
"Investigating abnormalities with wallet movements related to consolidation of ftx balances across exchanges - unclear facts as other movements not clear. Will share more info as soon as we have it," Ryne Miller, who is the general counsel of FTX U.S., the American subsidiary of FTX, confirmed on Twitter.
He added that the company was doing everything to protect the remaining assets and limit the damage.
"Among other things, we are in the process of removing trading and withdrawal functionality and moving as many digital assets as can be identified to a new cold wallet custodian. As widely reported, unauthorized access to certain assets has occurred."
Miller continued: "An active fact review and mitigation exercise was initiated immediately in response. We have been in contact with, and are coordinating with law enforcement and relevant regulators."
These alleged Illegal activities prompted Binance, the largest crypto exchange by volume, to suspend deposits of FTT, the cryptocurrency issued by FTX.
"We’ve noticed a suspicious movement of a large amount of $FTT," the firm announced on Twitter on Nov. 12. "#Binance has paused deposits of $FTT to keep users safe."
Accounts Frozen
The platform also decided to delist FTT from certain financial products "in order to protect our customers and prevent potential risks in extremely volatile market conditions."
Stock exchange Kraken said it froze accounts held by FTX and Alameda executives.
"Kraken has spoken with law enforcement regarding a handful of accounts owned by the bankrupt FTX Group, Alameda Research and their executives. Those accounts have been frozen to protect their creditors," the firm wrote on Twitter. "Other Kraken clients are not affected. Kraken maintains full reserves."
FTX and its sister company Alameda Research filed for Chapter 11 bankruptcy on Nov. 11, after suffering mass withdrawals of cash from customers concerned that these companies had provided false information regarding their account holdings and market values.
FTX, which was valued at $32 billion in February, held just $900 million in liquid assets on Nov. 8 against $9 billion in liabilities, according to the Financial Times.
"A lot of people have compared this to Lehman. I would compare it to Enron," former Treasury Secretary Larry Summers told Bloomberg about the FTX meltdown.
As a crypto exchange, FTX executed orders for their clients, taking their cash and buying crypto currencies on their behalf. FTX acted as a custodian, holding the clients’ crypto currencies.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market making. The cash FTX borrowed was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This represented a significant exposure, due to the concentration risk and the volatility of FTT.
Once this exposure came to light, clients, fearing an FTX collapse, rushed to liquidate their crypto positions and get their money back. Customers on Nov. 6, withdrew a record $5 billion, Bankman-Fried reported on Nov. 10. It was a run on the exchange. This led to the insolvency of FTX, since it did not have the crypto assets, now on loan or sold, to honor its clients’ sell orders.
It is difficult for the moment to fully assess the damage of this debacle, but it is certain that many firms had exposure to FTX and Bankman-Fried.
