FTX collapse: how did we get there?

We have all heard about the collapse of the crypto-currency exchange FTX. In this newsletter we will try to understand how such a wreck was possible.

What happened?

The timeline of what happened has been all over the news recently, we'll just recap the main ins and outs:

• On November 2, Coindesk revealed balance sheet concerns from Alameda Research which had a significant amount of FTT, the crypto issued by FTX, as collateral.
• Subsequently, on November 6, Changpeng "CZ" Zhao, CEO of Binance, announced that he was selling his $2.1 billion worth in FTT.
• On 11 November, both FTX and Alameda Research filed for Chapter 11 bankruptcy.

Timeline of the FTX collapse.

Who got impacted ?

The impact of the FTX collapse is still very obscure. Due to a lack of accounting clarity, the total liabilities are only an estimate:

• The estimated number of creditors ranges from 10,000 (from the Chapter 11 filling) to one million.
• The company also revealed that it owes $3.1 billion to its top 50 creditors. The number of retail or professional traders impacted is still unknown.
• These figures are quite small compared to the value destruction suffered by venture capitalists. FTX went from a $32 billion valuation to zero, and had big name investors such as Softbank, Sequoia Capital or Blackrock.

FTX valuations and VC investors

How was it possible?

After FTX completed chapter 11, John Ray was appointed as the new CEO, to restructure the company. He is best known for his work on the Enron collapse. I have read the 30 page report and here is what is interesting:

• There was a lack of records for official decisions due to the use of applications that automatically deleted messages.
• Company funds were used for personal expenses such as buying houses in the Bahamas. In particular, a personal loan of 1 billion dollar was granted to Mr Bankman-Fried.
• A substantial part of the company's assets may have been stolen, and the company, although weighing $32 billion, did not have an accounting department.
• The financial statements of Alameda Research or FTX have not been audited.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here” John Ray about FTX

Conclusion

This story raises a number of questions to which we do not yet have answers.

Even big names like Softbank and Blackrock failed to see in their due diligence the opacity of FTX's operations.

This could be due to FOMO, missing an opportunity to invest in the future "Goldman Sachs of crypto".

Regarding what could happen in the future, we might see contagion in the market, as crypto platform Genesis recently made news by seeking a bailout due to its exposure to FTX.

Only time will tell how the situation will evolve, but this case could lead to more regulation in the crypto industry.