Tag Archives: FTX

CME Group CEO called Bankman-Fried ‘an absolute fraud’

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“When you have the greatest quarterback of all time and a supermodel wife doing a commercial picking up the phone saying ‘Are you in, are you in, are you in.’ To me, it looks like a pump-and-dump scheme. People get very influenced by people like Tom [Brady].” ~ Terry Duffy, CME Group Chairman and CEO

FTX’s sudden and catastrophic collapse sent reverberations throughout the entire cryptocurrency industry. What was once the third-largest cryptocurrency exchange has filed for bankruptcy and has billions of dollars left in limbo.

FTX is a cryptocurrency exchange headquartered in the Bahamas. The exchange allowed users buy, sell, hold, and trade cryptocurrency (although those functions are currently unavailable due to the firm’s collapse as a result of FTX founder and CEO Sam Bankman-Fried’s fraud and misappropriation of its customers’ accounts), writes The Verge.

CME Group Chairman and CEO Terry Duffy suspected the fraud at the cryptocurrency exchange the day of his first one-on-one meeting with Bankman-Fried, stated during an interview with Melissa Lee on CNBC Fast Money.

Duffy recounted his March 2022 meeting with Bankman-Fried on the “On the Tape” podcast, which is hosted by “Fast Money” traders Guy Adami and Dan Nathan.

“You’re a fraud. You’re an absolute fraud,” Duffy said he told Bankman-Fried. Moreover, he tried to warn Congress and the financial sector that the disgraced FTX billionaire Bankman-Fried was a “fraud.”

Additionally, Duffy wanted to know why the Commodities Futures Trading Commission was even considering Bankman-Fried’s request to ease regulatory rules to push his trading model. He was told it was required under innovation guidelines.

“Right away my suspicions were up,” Duffy said. “Why is there so much pressure coming for this application? And then when I met with him, I knew right away this a joke.”

The FTX collapse is the biggest cryptocurrency exchange bankruptcy on record.

Duffy alleges that a former senior executive of the Commodity Futures Trading Commission (CTFC) was closely aligned with Bankman-Fried. “I hope someone has the courage to ask, ‘Was anybody putting pressure on the CFTC to move forward with an application that could have put everything at risk?’” Duffy said.

The former CEO Bankman-Fried is facing a barrage of civil and reportedly criminal investigations after allegedly transferring billions in customer funds from FTX, the crypto trading platform he founded in 2019, to Alameda Research, a crypto trading firm he founded in 2017.

References:

  1. https://www.cnbc.com/2022/11/23/absolute-fraud-cmes-terry-duffy-says-he-saw-trouble-before-ftx-collapse-.html
  2. https://www.foxnews.com/media/sam-bankman-fried-easy-pick-out-fraud-cme-group-chief-terry-duffy

“Any time there is a boom cycle like this, otherwise smart investors do dumb things because they see their pals and peers piling in and worry they will be left out. Envy is a pernicious quality — and one that is all too human.” ~ Andrew Ross Sorkin

The Impact of FTX’s Collapse

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“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, new FTX CEO

Crypto exchange FTX filed for bankruptcy after a stunning five-day collapse of the once-$32 billion dollar crypto company as concerns over its financial health led to a surge in withdrawals and a plunge in the value of its native FTT token. FTX’s founder, Sam Bankman-Fried (SBF), resigned as CEO.

As a result of the collapse, the company and its leadership are facing investigations and potential criminal charges in both the Bahamas and the U.S. for its misappropriation of users’ assets and allegations of fraud. 

Before its collapse, FTX offered retail and professional traders spot crypto investing as well as more complex derivatives trades. At its peak, the platform was valued by investors at $32 billion and had more than 1 million users.

FTX’s books revealed the exchange had more than $9 billion in liabilities, but less than $1 billion in liquid assets the day before its bankruptcy filing. And, after an apparent hack (or “unauthorized access” via a backdoor by SBF) drained $477 million of the company’s remaining assets, customers are facing long odds of ever recovering much of their deposits.

After FTX collapse, at least $1 billion in customer funds are unaccounted for, and FTX may owe as many as one million creditors. Additionally, FTX’s collapse has resulted in:

  • Crypto’s total market cap has dropped below the $1 trillion mark since FTX’s trouble started early last week, and sits near $826 billion as of Wednesday morning, November 9. 2022.
  • After the firm’s bankruptcy filing, BTC price sank nearly 25%, dropping below $16,000, before slightly recovering; ETH fell by more than 30% in the same span.
  • Market contagion and liquidity issues have spread to a growing number of crypto businesses that have suspended redemptions, citing “extreme market dislocation … caused by the FTX implosion.”
  • Several major players have halted customer withdrawals and cited “significant exposure to FTX.” Others are planning to file for bankruptcy.

CNBC reported that Alameda Research, FTX’s sister company, had borrowed billions in customer funds from the exchange to make risky leveraged trades, leaving FTX caught short when users wanted to withdraw their money.

In general, mixing customer funds with counterparties and trading them without explicit consent is illegal, according to U.S. securities law. It also violates FTX’s terms of service. “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,” said newly appointed FTX CEO John Jay Ray III – a bankruptcy expert with more than 40 years of restructuring experience who liquidated Enron.

Former CEO Bankman-Fried declined to comment on allegations but said the company’s recent bankruptcy filing was the result of fraud, misappropriation and issues with a leveraged trading position placed by Alameda Research.

“In the Bahamas, I understand that corporate funds of the FTX group were used to purchase homes and other personal items for employees and advisors,” Ray wrote. “I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.”

Moreover, larger investors and traditional firms been impacted

  • Since its founding in 2019, FTX raised nearly $2 billion in capital from sources like venture capital firms and pension funds, and its bankruptcy means that many of its investors will likely need to write their investments off as losses. 
  • SoftBank, Tiger Global, and Sequoia Capital are among the many well-known firms who made now-worthless bets on FTX. Sequoia was marking its $213 million stake down to $0. 
  • The impact isn’t limited to venture capital firms either — the Ontario Teachers Pension Fund lost $95 million investing in FTX’s funding rounds and professional athletes celebrities like TV producer Larry David and NFL quarterback Tom Brady are among the individuals who had equity stakes in and promoted the company. 
  • In an emergency court filing, evidence suggests Bahamian regulators directed former CEO Sam Bankman-Fried to gain “unauthorized access” to FTX systems to obtain digital assets belonging to the company and to transfer those assets to the custody of the Bahamian government.

In the wake of the FTX exchange’s collapse, there has been calls from financial business leaders and lawmakers regarding the need for greater oversight and regulation of the crypto industry.

U.S. Congressman Patrick McHenry, the top Republican on the House Financial Services Committee, said: “It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S.”

Source: Coinbase Bytes

References:

  1. https://www.cnbc.com/2022/11/15/ftx-says-could-have-over-1-million-creditors-in-new-bankruptcy-filing.html
  2. https://www.businessinsider.com/ftx-managers-used-online-chat-emojis-approve-official-expenses-ceo-2022-11
  3. https://www.cnbc.com/2022/11/17/ftx-suggests-sam-bankman-fried-transferred-assets-to-bahamas-government-custody-after-bankruptcy-filing.html

FTX Downfall

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“It’s only when the tide goes out that you learn who has been swimming naked.” Warren Buffett

Things may look good and rosy up to a certain point, but if a company is leveraged too much expecting a wave to come, but instead the tide goes out, everything will be exposed. Federal Reserve Chairman Jerome Powell aggressive interest rate hikes to counter inflation exposed all sorts of companies that were relying on cheap capital to either grow or survive.

In FTX case, a Bahamian cryptocurrency exchange, things were great for a while. Investors were excited about the way the stock price continued to melt up.

FTX was the third-largest crypto market in the world at the start of last week when it announced liquidity problems and would need a massive infusion of cash to stay afloat. However, the tide went out and the problems at FTX began to surface and then totally self-destruct.

In theory, exchanges like FTX make money by allowing customers to trade cryptocurrencies and collecting fees for transactions.

“It was a success story almost too good to resist. In just over three years, FTX would go from nothing to a $32 billion company. Now it’s back to nothing.” ~ Brandon Kochkodin, Forbes Staff

According to WSJ, FTX problems are a result of the loans it extended to Alameda using money that customers had deposited on the exchange for trading purposes. It was a decision that Mr. Sam Bankman-Fried (SBF), the crypto wunderkind who founded the exchange and then drove it into bankruptcy, described as a poor judgment call, writes the Wall Street Journal.

In March 2022, the Fed started raising interest rates to battle inflation. Speculative investment assets started tanking and a number of crypto funds and brokerages crashed. FTX came in as a bailout “savior” with the apparent purpose of sweeping in depositor funds into FTX.

Additionally, SBF’s hedge fund Alameda Research was also hit hard by the crypto drop. SBF was able to temporarily hide the problem by “borrowing” customer deposits at FTX to plug the hole at Alameda. This move may be a violation of the terms of service and potentially violate regulations.

All in all, FTX had $16 billion in customer assets. It is believed that the unregulated exchange transferred more than half of its customer funds to its sister company Alameda, according to WSJ.

In traditional markets, brokers must keep client funds segregated from other company assets. Cryptocurrencies and brokerages that trade them remain unregulated, which means it may not be legally possible for any government agencies to step in to reimburse FTX customers, said corporate lawyer Eric Snyder, chairman of bankruptcy at Wilk Auslander.

“Absent any regulation, it’ll be difficult to show fraud if the agreements between FTX and their customers allowed FTX to use investments at their discretion,” Synder said.

The root of FTX’s downfall lay in its relationship with Alameda, a firm known for aggressive trading strategies funded by borrowed money and allegedly operated by Mr. Bankman-Fried’s ex-girlfriend as CEO of Alameda. Mr. Bankman-Fried is the majority owner of both firms, FTX and Alameda. He was CEO of Alameda until last year, when he stepped back from the role to focus on FTX.

“There’s one fundamental takeaway: Bitcoin itself should never be leveraged. It cannot be leveraged safely. And anybody who thinks that they can lever it safely is going to learn a very hard lesson: that illiquidity is the same thing as insolvency,” commented Caitlin Long, founder and CEO of Custodia Bank, on CNBC’s The Exchange

References:

  1. https://www.forbes.com/sites/brandonkochkodin/2022/11/11/the-red-flags-on-ftx-we-all-seemed-to-miss/?sh=23f8a20111f6
  2. https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732
  3. https://www.oldschoolvalue.com/investing-strategy/warren-buffett-quotes/#8_Swimming_Naked_is_Cute_Only_for_Babies
  4. https://www.cnbc.com/amp/2017/12/11/bitcoin-millionaire-grant-sabatier-dont-buy-bitcoin.html
  5. https://www.marketwatch.com/story/ftx-filed-for-chapter-11-bankruptcy-heres-what-account-holders-should-know-about-this-very-messy-and-complex-bankruptcy-case-11668202547?mod=mw_latestnews