FTX Event Anniversary: Reflecting on the Pain and Scars, Future Outlook

Table of Contents

"FTX One-Year Anniversary - Ashes"

This series of articles is jointly completed by media partners: Zombit, Daily Coin Research, Grenade, Crypto City

John Ray Takes Over: Claims Website and Costly Litigation

After the bankruptcy team took over, FTX began a lengthy restructuring process, led by renowned lawyer John Ray as the CEO of FTX. John Ray had previously been a Chicago lawyer involved in the liquidation of Enron Corporation. The Enron bankruptcy occurred in October 2001, making it the largest bankruptcy case in U.S. history and also the largest audit failure event.

Due to the severe lack of company operational records and financial information at FTX, the bankruptcy team hired a large number of consultants and lawyers, trying to unearth all unrecorded remaining assets from different places and claim funds from various related debt entities. However, while actively handling the bankruptcy process is a good thing, it also comes at a cost to the creditors.

According to statistics, the bankruptcy management team burned through $330 million in funds within 8 months of taking over, and these costs naturally had to be borne by the creditors. The increasing expenses of the bankruptcy management team made many creditors restless. The FTX Creditors Committee had openly criticized the bankruptcy management team for spending money recklessly during the bankruptcy hearing in August:

"Now they are spending nearly $50 million per month, with almost hundreds of lawyers, financial advisors, and bankers actively involved in this case, and each expense basically directly reduces the funds that creditors may recover."

On the other hand, an anonymous lawyer with bankruptcy experience, wassielawyer, pointed out that the reason the bankruptcy management team dared to spend so lavishly was that the cryptocurrency field lacked the ability to balance these "financial vultures." wassielawyer explained that in traditional financial fields, creditors or other interested parties usually scrutinize and balance these activities. No one is willing to risk their reputation in the financial industry for a little extra profit, especially when financial giants like BlackRock are among the creditors, no one dares to offend.

However, the bankruptcy team taking over FTX and Three Arrows Capital did not care about the cryptocurrency industry's view of them. Even if the most influential people or entities in the cryptocurrency industry were dissatisfied with them, they were unaffected because these people would hardly have any future dealings with these cryptocurrency funds or traders. Their actions would not affect their professional reputation. In this situation, FTX creditors may only have two ways to balance the team's continued spending: "to collectively raise their voices to attract the attention of the bankruptcy court" or "to sell the debt to traditional financial institutions' old hands" to hold the bankruptcy management team accountable.

The Truth Revealed: FTX's Chaotic Relationship with Alameda

After the bankruptcy reorganization team and the new CEO John J. Ray III took over, the messy details of FTX's fund management gradually emerged.

John Ray once stated:

"In my career, I have never seen a company so completely failed in control and completely lacking in credible financial information."

SBF: User Deposit Addresses Shared with Alameda

This is SBF's current statement. In November, he told Vox reporter Kelsey Piper about the long-standing misplacement of user addresses with Alameda:

"It's like FTX doesn't have a bank account, but everyone can wire money to Alameda's bank account and trade on FTX. Three years later, it seems that everyone has wired about $8 billion to Alameda, but we forgot the relationship between Alameda and FTX accounts, resulting in some funds never being credited to FTX."

However, such claims were overturned after John Ray and the CFTC's investigation.

FTX's former CTO Gary Wang testified in court recently, stating that Alameda can withdraw funds from FTX indefinitely.

Therefore, massive misappropriation of customer deposits, excessive spending, along with a massive run on the bank in November 2022 leading to insolvency, seems to be the main cause of FTX's bankruptcy.

Alameda Provides Executives Unlimited Loans

John Ray cited legal documents last year indicating that Alameda had provided loans to three FTX executives:

• SBF: $1 billion
• FTX Engineering Director Nishad Singh: $543 million
• FTX Digital Markets Co-CEO Ryan Salame: $55 million

Alameda Will Not Be Liquidated

John Ray revealed to the bankruptcy court that Alameda was to some extent exempt from FTX's automatic liquidation agreement.

This statement is also consistent with the CFTC's investigation.

In a complaint filed by the U.S. Department of Justice, the Federal Reserve, and the FDIC, another crypto-friendly bank, Signature, has been shut down by its state-chartered agency due to similar systemic risks.

Multiple Executives Confess, SBF Arrested and on Trial

Several top executives at FTX have been pursued by U.S. regulators. Four executives: FTX Engineering Director Nishad Singh, FTX Co-Founder and CTO Gary Wang, former CEO of Alameda Research Caroline Ellison, and former Co-CEO of FTX Digital Markets FTX Bahamas entity Ryan Salame, have all pleaded guilty, with all but Ryan Salame becoming tainted witnesses.

Founder SBF has consistently denied guilt. After being indicted in December 2022, he was arrested by Bahamian authorities and extradited back to the U.S. in the same month. In October 2023, the U.S. New York court began SBF's trial, with former FTX executives testifying in court, revealing a series of secrets. For example: SBF's ambition to become the U.S. President, FTX's insurance fund being randomly generated, venture capital Paradigm admitting to inadequate due diligence, Alameda's former CEO blaming everything on SBF, and SBF's brother's involvement in the case, among others.

Furthermore, SBF's parents Joseph Bankman and Barbara Fried are also seen as key figures in the FTX empire, responsible for taxation and political relations. The bankruptcy reorganization team has also filed lawsuits against the two.

The case is still ongoing, and from the testimonies, it can be understood that FTX abused assets, SBF's ruthless ambition to achieve goals, executive collusion in fraudulent behavior, and blind trust from the capital markets towards FTX. Based on the existing evidence, many related individuals are likely to face further scrutiny.

On November 3, 2023, a jury unanimously agreed to the seven charges against SBF. The tentative sentencing date is March 28, 2024, with SBF facing a total of 115 years in prison for the seven charges.

Crypto World VC Victims, Multiple Banks Go Bankrupt

Listing FTX's Institutional Victims One by One

After the bankruptcy of FTX, institutional investors of FTX suffered losses along with retail investors. Many well-known VCs incurred losses ranging from tens of millions to over a billion dollars, including:

• Paradigm: $290 million
• Jump Trading: $280 million
• Sequoia Capital: $213.5 million
• Pantera Capital: possibly over $100 million
• Softbank: nearly $100 million
• Galaxy Digital: $76.8 million
• Galois Capital: $40 million
• Tiger Global: about $38 million in equity
• CoinShares: about $30 million
• Multicoin Capital: about $25 million
• SkyBridge: $10 million

Additionally, crypto revenue and lending platforms could not bear the crisis, with several companies closing down in the months following the incident, including DCG subsidiary Genesis and BlockFi. The bankruptcy declared by Celsius due to the UST collapse event also temporarily froze $13.9 million that could not be recovered due to the FTX bankruptcy.

Looking back at Taiwan, besides FTX, the platforms that have the most significant impact on Taiwan users are the asset management platform Steaker and the exchange AAX. Steaker has launched the Aurora Plan to gradually repay user assets, but the funds that users can currently retrieve are still quite limited. As for AAX, it has remained silent, with no visible compensation actions for users.

See the complete list of creditors here

Crypto Crisis Spreads, Banking Institutions Go Bankrupt One after Another

The crypto market crash not only affected companies and investors in the industry but also had a ripple effect on traditional banking institutions.

The first warning was issued by the crypto-friendly bank Silvergate, which, to cope with the volatility of the cryptocurrency market and large withdrawals by customers, sold substantial bonds at a loss at the end of last year, leading to an inability to submit Q4 financial reports.

Ultimately, Silvergate was divested by multiple crypto companies and, unable to operate smoothly, announced its self-liquidation in March of this year.

Following Silvergate's liquidation announcement, Silicon Valley Bank, a bank known for providing financing services to tech startups, faced the same predicament due to higher-than-expected customer deposit outflows. The need to sell bonds at a discount resulted in a $1.8 billion loss and an overnight stock price collapse.

Stablecoin issuer Circle also raised concerns about the stability of USDC by using Silicon Valley Bank as a reserve bank, causing USDC to unpeg temporarily.

To mitigate this financial disaster, the FDIC announced its takeover of SVB the day after its stock collapse, and SVB filed for bankruptcy reorganization in New York a week later.

In a joint statement by the U.S. Treasury Department, the Federal Reserve, and the FDIC, another crypto-friendly bank, Signature, was closed by its state-chartered agency due to similar systemic risks.

The Impact and Changes in the Crypto Industry

FTX's collapse has put enormous pressure on the U.S. crypto industry: the Federal Reserve attributes part of the bank closures to the "cryptocurrency industry," and Coinbase and Binance US subsequently faced strong enforcement actions for offering unregistered securities and other violations. Moreover, the SEC and CFTC have significantly increased enforcement cases against exchanges, DeFi platforms, NFT operators, etc., involved in illegal activities. The industry's stance on regulation has shifted from negotiation and communication to fierce backlash. FTX's extensive involvement in the political sphere has led future political figures to no longer actively advocate for cryptocurrencies as they did in the past.

The mature and diverse financial regulation in the U.S. makes it less inclined to establish special laws for regulation but rather interpret and enforce existing laws. Outside the U.S., other regions are more proactive in establishing cryptocurrency regulatory frameworks: the European Parliament passed the MiCA law in 2023, Hong Kong set up a trading platform licensing framework, the UK and Canada tightened regulations causing many exchanges to exit, and Japan and Singapore continue to enhance existing frameworks. Taiwan also issued guidance principles in 2023 and opened up to self-regulation by public associations.

"Proof of Reserves" has become a necessary marketing tool for centralized exchanges, using encryption technology to verify using on-chain addresses to convince users that the platform has not misappropriated assets or has good financial standing. Although exchanges only partially disclose this information, and the true financial situation is unknown, the FTX incident has made "Proof of Reserves" a widespread awareness among users.

The FTX incident has resulted in numerous venture capital firms, startups, traditional financial institutions, and investors paying a hefty price. The U.S. continues to raise interest rates to combat inflation, coupled with the rise of AI, hot money clearly exits the cryptocurrency market. FTX has given a more negative impression of cryptocurrencies globally, with exchanges significantly downsizing in a bear market, startups ceasing operations, and even the oldest DeFi exchange protocol Uniswap starting to charge fees for operations.

On the other hand, we also see traditional financial institutions actively involved in the digital asset space: financial giant BlackRock entering the competition for a Bitcoin spot ETF, Citadel-supported compliant exchange EDX