Both the crypto exchange FTX and its notorious founder and CEO, Sam Bankman-Fried, are currently under investigation by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) regarding the ongoing collapse of the firm. In the most recent development, FTX has filed for bankruptcy protection.
The exchange's trouble became apparent in early November when customers began pulling out of the exchange en masse due to concerns over FTX's solvency and allegedly improper use of customer deposits. Both the federal investigations and customer concerns center on the possibility that Bankman-Fried used FTX customers' money to make bets via his hedge fund, Alameda Research.
FTX had promised customers that it would not treat the money on the exchange as the company's own funds. Hedge fund brokers are also expected to differentiate between money from investors and the company's other assets.
On Nov. 7, Bankman-Fried posted on Twitter (NYSE: TWTR) downplaying concerns over FTX's risk of collapse, insisting that the exchange had enough money to cover customers' deposits. The CEO's posts came after CoinDesk reported that Alameda had accumulated $8 billion in liabilities and that the majority of its $14.6 billion of assets were made up of FTX tokens, FTT.
A day after tweeting that the exchange was "fine", Bankman-Fried announced that he would be selling FTX to Binance, the exchange's larger competitor. However, Binance pulled out of the deal after it became apparent just how bad FTX's financial situation is. The exchange is short billions of dollars.
Previously the fourth-biggest crypto-exchange in the world, FTX still didn't have the kind of systemic safety nets that big banks had after the 2008 financial crisis. The crypto market is much less regulated and also still hasn't reached the sort of scale needed to justify a bailout.
"Most of the activity in crypto continues to remain trading and speculation, hence, broadly the impact from any downside in crypto is also quite limited in a way, compared to banking and financial services in 2008 where the impact was much more entrenched and wide spread," said the vice president of corporate development and strategy at crypto exchange Luno, Vijay Ayyar.
FTX is far from the first crypto exchange to face a meltdown, and it won't be the last. In the same week as FTX's collapse, crypto lender Celsius filed for bankruptcy when it became unable to cover customer withdrawals following a drop in the value of its primary tokens. Some expect the blockchain platform Solana to be the next company to implode, thanks to its connections to Alameda, which holds more than $1 billion in Solana's tokens, Sol.
"Is this the end of [the crypto contagion] or will there be any further dominoes to fall? It's anyone's best guess," the CEO of crypto wallet firm Ledger, Pascal Gauthier, said. "People should not wait to find out."
On Nov. 12, rumors began to spread that Bankman-Fried had fled to South America after a flight-tracking Twitter account posted about a flight from Nassau to Argentina alleging the crypto CEO was on board. However, Bankman-Fried has denied these rumors, telling the Associated Press that he was at his full-time residence in the Bahamas.