Portfolio Perspective –

Portfolio Perspective

November 16, 2022

The collapse of FTX: Lead balloon or silver lining?


The collapse of FTX, one of the world’s largest cryptocurrency (crypto) exchanges, has roiled crypto markets since the start of November. FTX has seen its value crumble from an estimated $32 billion early in 2022, as it was raising investor capital, to near zero as it now enters bankruptcy. The CEO and founder of FTX, Sam Bankman-Fried (known as SBF), resigned and relinquished his duties to John Jay Ray III, the veteran bankruptcy lawyer who steered Enron and Nortel through their bankruptcies.

The situation remains fluid and speculation about what happened has been rampant, but early indications suggest fraud at FTX and its Alameda Research affiliate both founded by SBF.  While the contagion in crypto assets from the FTX bankruptcy may continue for the near term, with additional potential bankruptcies, fears that this could be the demise of crypto are likely unfounded. In the short-term, however, FTX and Alameda Research clients, creditors and investors have been negatively impacted.

A potential silver lining to the FTX fallout could be an accelerated regulatory push to craft legislation protecting investors, especially regarding stablecoins and centralized exchanges. This complex story will continue to unfold in the coming weeks.

Below we:

  • Identify and introduce key players in the FTX collapse
  • Share a contextual timeline of recent events leading to the collapse of FTX
  • Discuss the impacted parties from the FTX collapse
  • Consider potential remedies and likely regulatory paths for the incoming House and Senate

What happened

  • FTX was one of the world’s largest centralized cryptocurrency exchanges serving investors in both the U.S. and abroad.
  • Alameda Research engaged in cryptocurrency trading and market making with a large portfolio of other cryptocurrency related firms.
  • Samuel Bankman-Fried (SBF) founded both firms, served as CEO and was a self-promoted advocate for the cryptocurrency industry, a frequent visitor to Capitol Hill lawmakers, and a large political donor.
  • The bankruptcy proceedings apply to Alameda, FTX and approximately 130 affiliated FTX companies

A November 2nd article raised red flags by highlighting the interdependent relationship between SBF-founded Alameda Research and the FTX cryptocurrency exchange. The article focused on the $14.6 billion Alameda balance sheet and its concentrated holdings of at least $5 billion FTT, the native token of FTX, raising concerns about the potential conflicts of interest between FTX and Alameda and their solvency. This triggered allegations of fraud and a firestorm of panic selling in FTT as investors exited positions and FTX was forced to meet liquidity needs.

While the situation remains fluid, additional information continues to shed light on the inner dealings of these two firms and their collapse. As of this writing, SBF has resigned and an interim CEO has been appointed to manage the FTX bankruptcy. Additionally, regulators including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the U.S. Department of Justice (DOJ) have launched investigations.

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