One of the world’s largest cryptocurrency exchanges, FTX, has collapsed, with what is reported to be an $8bn (£6.8bn) black hole on its balance sheet. Of its 1 million users, many are now unable withdraw their funds. On Friday, the FTX group, run from offices in America but headquartered in the Bahamas, filed for bankruptcy protection in the US.
FTX’s rival, Binance, has played a key role in the saga. Here is a step by step account of how the disaster unfolded.
The protagonists
Known by the monikers SBF and CZ, Sam Bankman-Fried and Changpeng Zhao could be seen as two sides of the same crypto coin. In a few short years, they built two of the largest digital currency exchanges: FTX and the biggest, Binance. As former business partners and major players in a multibillion-dollar industry, their highs, and lows, are intertwined. But their backgrounds are very different.
Bankman-Fried, 30, is the son of Stanford University professors and a graduate of Massachusetts Institute of Technology. He made multimillion-dollar political donations, appearing on Capitol Hill in a regulatory lobbying drive, rubbing shoulders with the likes of Bill Clinton and Tony Blair at FTX conferences, and paying for his company’s name to adorn Miami Heat’s basketball arena in Florida. His fortune, worth about $16bn at the start of the week, has now evaporated.
Zhao, 45, was born in the coastal province of Jiangsu, north of Shanghai, and followed his academic father to Canada when he was 12. Zhao is now a Canadian citizen. After graduating from Montreal’s McGill University with a degree in computer science he worked on programming systems for the Tokyo Stock Exchange and Bloomberg, before launching Binance in 2017. His fortune has taken a hit too, falling by $79bn this year to a still-huge $16.4bn, according to Bloomberg. It will probably remain under pressure as Bankman-Fried’s woes play out.
Wednesday 2 November
Zhao was in Lisbon last week when the fuse was lit on the FTX crisis. The Binance chief executive was a headline speaker at the annual Web Summit – a gathering of the great and good of the tech world – and as usual he was defending the long-term future of digital assets.
“I think volatility is always going to be there. It’s a trading market. It’s just like a stock market. If stock markets don’t have volatility, who will invest?” he told the Guardian.
It turns out a renewed bout of volatility was imminent.
As Zhao spoke, the crypto news service CoinDesk published claims about the balance sheet of Alameda Research, a crypto hedge fund owned by the FTX founder, Sam Bankman-Fried. Alameda held billions of dollars worth of FTX’s own cryptocurrency, FTT, and had been using it as collateral in further loans. This meant a fall in FTT’s value would hurt both firms, given their shared ownership.
Friday 4 November
Following the CoinDesk report, a pseudonymous crypto researcher, Dirty Bubble Media, published further claims about Alameda on Substack, the newsletter platform. Its newsletter asked if the company was insolvent. Referring to the holding of a chunk of assets in FTT, it added: “It’s almost as if SBF [Sam Bankman-Fried] found a way to hack the financial system, printing billions of dollars out of thin air against which he was able to borrow massive sums from unknown counterparties.”
Sunday 6 November
Zhao set off alarm bells among investors when he tweeted “due to recent revelations that have come to light” Binance would “liquidate” its holding of FTT tokens. Its position was thought to be around 5% of the total, worth around $580m before the currency crashed.
In 2019, Binance had invested as a shareholder in FTX. It exited that shareholding last year and received $2.1b in Binance’s own stablecoin (BUSD) and in FTT tokens as part of the deal.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
As the consequences of the move rippled through the crypto industry, Zhao tweeted “We are not against anyone’”. But in the same post he added: “But we won’t support people who lobby against other industry players behind their backs.” A source close to Binance said there was no ill-intent towards FTX in the FTT sale.
This lobbying aside appeared to be a reference to Bankman-Fried, who had spent millions of dollars funding US Democrat politicians and lobbying for closer regulation of crypto trading in Washington.
Monday 7 November
Bankman-Fried reacted to the weekend turmoil on Monday with his own series of tweets, alleging: “A competitor is trying to go after us with false rumours.” He added: “FTX is fine. Assets are fine.”
He didn’t identify who he was referring to. But he then tagged Zhao, who has committed $500m of Binance’s money to helping Elon Musk buy Twitter, with a tweet in which he said: “I’d love it, @cz_binance, if we could work together for the ecosystem.”
Tuesday 8 November
In an apparent cessation of hostilities, Zhao announced that Binance would buy FTX and rescue it.
“This afternoon, FTX asked for our help,” tweeted Zhao. “There is a significant liquidity crunch. To protect users, we signed a non-binding [letter of intent], intending to fully acquire FTX.com.”
Bankman-Fried confirmed the deal on Twitter: “Things have come full circle, and FTX.com’s first, and last, investors are the same: we have come to an agreement on a strategic transaction with Binance for FTX.com (pending DD etc).”
The DD – or due diligence – was going to be the most consequential phrase in that tweet.
Wednesday 9 November
As rumours grew of a hole in FTX’s balance sheet, Zhao suddenly pulled the plug and tipped Bankman-Fried’s enterprise into full-blown crisis. Having looked under the bonnet, Binance said it could no longer push ahead with the deal.
“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,” Binance said in a statement.
Zhao tweeted that it was a “sad day”.
Sad day. Tried, but 😭
— CZ 🔶 Binance (@cz_binance) November 9, 2022
Thursday 10 November
As FTX scrambled for a new white knight, Bankman-Fried returned to Twitter to state that he had “fucked up, and should have done better”. FTX’s future was now in serious doubt.
Friday 11 November
FTX filed for Chapter 11 bankruptcy protection in the US, in a move that included its US platform and Alameda. Bankman-Fried was replaced as chief executive by John Ray III, a turnaround and restructuring lawyer who worked on the liquidation of the collapsed energy giant Enron. Hours before the collapse was confirmed, Zhao warned the crypto market faced a 2008-style crisis with more failures to come. He told a conference in Indonesia that the global financial crisis was “probably an accurate analogy” to this week’s events, the Financial Times reported.
For his part, Bankman-Fried tried to stay positive. Announcing the bankruptcy on Twitter, he apologised again, saying: “Hopefully things can find a way to recover. Hopefully this can bring some amount of transparency, trust, and governance”.
