What Happened To FTX?

In a strange turn of events, on November 8, 2022, FTX turned into a liquidity crunch, which cascaded into one of the most significant crypto crashes since the foundation of Bitcoin.

FTX’s founder’s announced:

1) Hey all: I have a few announcements to make.

Things have come full circle, and http://FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for http://FTX.com (pending DD etc.).

2) Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in. It may take a bit to settle etc. — we apologize for that.

3) But the important thing is that customers are protected.

4) A *huge* thank you to CZ, Binance, and all of our supporters. This is a user-centric development that benefits the entire industry. CZ has done, and will continue to do, an incredible job of building out the global crypto ecosystem, and creating a freer economic world.

5) I know that there have been rumors in media of conflict between our two exchanges, however Binance has shown time and again that they are committed to a more decentralized global economy while working to improve industry relations with regulators. We are in the best of hands.

6) (Note that http://FTX.us and http://Binance.us–two separate companies–are not currently impacted by this. http://FTX.us’s withdrawals are and have been live, is fully backed 1:1, and operating normally.)

Originally tweeted by SBF (@SBF_FTX) on November 8, 2022.

On the other hand, Binance’s CEO, CZ, also made an announcement over Twitter:

This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire http://FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days.

There is a lot to cover and will take some time. This is a highly dynamic situation, and we are assessing the situation in real time. Binance has the discretion to pull out from the deal at any time. We expect FTT to be highly volatile in the coming days as things develop.

Stay #SAFU. 🙏

Originally tweeted by CZ 🔶 Binance (@cz_binance) on November 8, 2022.

What happened there?

Apparently, the lack of corporate governance of FTX, which at the same time, was doing business with Alameda research, by borrowing deposits from FTX customers to enable Alameda research to speculate on the price of crypto assets, created a hole in FTX.

In addition, to recap a bit of the history.

CZ, founder of Binance was also an investor in FTX in the past. Yet, as he divested his shares into FTX, FTX gave Binance, in exchange for its stake, two billion dollars worth of FTT.

What’s FTT? It’s a token that FTX created for crypto rewards and discounts for trading on its platform.

The interesting thing, as it seems, is the relationship between CZ and SMF deteriorated in the last few years. Culminating with a war between the two.

Apparently, CZ, maddened by the fact that SMF might have been talking badly about Binance to regulators, finally decided to unload its FTT position, thus creating a liquidity crunch on the over-leveraged FTX.

Thus, at the same time, forcing FTX to be potentially taken over!

Yet, on November 9th, after reviewing the balance sheets, Binance decided not to go for the deal.

CZ, Binance’s co-founder, shared on Twitter the letter explaining the last days before the potential deal.

As CZ explained, the core points of the discussion.

And Binance also explained on Twitter:

As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of http://FTX.com.

And further articulated:

In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help.

This showed a complex situation where FTX’s liabilities on balance sheets are way worse than expected.

A systemic collapse might be on the way in a crypto ecosystem with no last-resort savior.

Table of Contents

FTX Hacked, and funds siphoned

The story of FTX gets even worse. Following it on Twitter, as the days go by, it seems almost like watching the unraveling of Enron live!

As the story unfolds, details that seem to come out straight from a Netflix series emerge about FTX corporate governance.

FTX was using an auditing firm whose only headquarters was in the Metaverse!

The FTX case is such a mess, as SBF had placed a series of bets everywhere in the crypto ecosystems.

In addition to the madness of the story, on November 12th, FTX seemed to have been hacked. And it’s not clear whether this hack came from insiders who tried to siphon funds out from the exchange before liquidation.

Key Highlights:

FTX, a prominent crypto exchange, experienced a liquidity crunch and one of the most significant crypto crashes in November 2022.
FTX’s founder announced a strategic transaction with Binance to address the liquidity crunch, and Binance agreed to help cover the situation.
The lack of corporate governance at FTX, including borrowing deposits from customers for speculative purposes, led to a hole in the exchange’s finances.
CZ, the founder of Binance, was an investor in FTX in the past and had divested his shares for FTT tokens, a token created by FTX for crypto rewards and trading discounts.
The relationship between CZ and FTX’s founder, SMF, deteriorated, leading to a potential takeover offer by Binance.
After conducting corporate due diligence, Binance decided not to pursue the acquisition of FTX due to concerns about FTX’s balance sheets and issues beyond their control.
FTX’s situation worsened as it was hacked, and details about its corporate governance and use of a questionable auditing firm in the Metaverse emerged.
Uncertainty surrounded the hack, with suspicions that it could have been an inside job to siphon funds before potential liquidation.