International Journal of Law and Legal Studies ISSN 2736-1608 Vol. 11(2), pp. 001-003. June, 2023.

Available online at www.internationalscholarsjournals.org © International Scholars Journals

Author(s) retain the copyright of this article.

Case Report
The Rise and Fall of FTX
Lin William Cong1*, Jingtao Zheng2
Department of Finance, Cornell University SC Johnson College of Business, Ithaca, USA
1

2
Department of Finance, University of Chicago Booth School of Business, Chicago, USA
Received: 18-May-2023, Manuscript No IJLLS -23-99272; Editor assigned: 20-May-2022, PreQC No IJLLS -23-99272 (PQ); Reviewed: 05-June-2023 QC
No. IJLLS -23-99272; Revised: 12-Jun-2022, Manuscript No. IJLLS -23-99272 (R); Published: 21-Jun-2023.

The abrupt downfall of Futures Exchange (FTX) has sent shockwaves throughout the cryptocurrency industry.
In this case report, we delve into the causes and consequences of the crisis at the FTX exchange, examining the
precarious relationship with Alameda that sowed the seeds of danger. The extensive lending of money to Alameda,
using FTX’s own token as collateral, gave rise to a death spiral, a destructive interplay between FTX’s assets and
liabilities. While the repercussions of the event extended to other crypto related entities, the fallout was predomi-
nantly contained within the crypto sector. We conclude with a discussion on the future regulatory landscape and its
implications for the industry.

Key words: CeFi, Cryptocurrency, FinTech, Regulation, Run.

INTRODUCTION crypto industry, especially concerning the current practice

of Centralized Finance (CeFi) and the problem of vertical
In this case report, we dissect the rise and precipitous fall of integration.
Futures Exchange (FTX), a leading cryptocurrency derivatives CASE PRESENTATION
exchange. The narrative centers around its genesis in 2019,
spearheaded by Sam Bankman-Fried and Gary Wang, its rapid Rise of FTX
ascent within the crypto exchange landscape, and the subsequent FTX, short for “Futures Exchange,” is a cryptocurrency
unraveling of its operations following a series of unsettling derivatives exchange founded in May 2019 by Sam Bankman-
revelations and a run on the exchange. The study meticulously Fried and Gary Wang (https://www.reuters.com/article/
charts FTX’s journey, drawing on a series of pivotal events and fintech-crypto-ftx-idUSL1N33300O). Prior to establishing
decisions that culminated in the exchange’s voluntary initiation FTX, Bankman-Fried founded Alameda Research, a highly
of Chapter 11 proceedings, and the consequential ripple effects profitable crypto trading firm, in September 2017. From its
that reverberated through the crypto industry. inception, FTX garnered significant attention from investors,
To offer a comprehensive understanding of the multifaceted thanks to its founder’s impressive entrepreneurial track record,
issues surrounding the fall of FTX, the study delves into academic background, and work experience. FTX attracted
the causes and consequences of the collapse. It scrutinizes top-tier venture capital investors, high net worth individuals,
the unsound fundamentals of FTX, the mechanics of a and strategic partners. In November 2019, Changpeng Zhao
classical bank run, and the interplay between FTX’s assets (CZ) of Binance acquired a 20% stake in FTX. By 2022, FTX
and liabilities. In its aftermath, the case study analyzes the had risen to become the third-largest crypto exchange, offering
spill-over effects that disrupted the cryptocurrency market, an extensive array of products such as its native currency FTT,
affecting individual cryptocurrencies, other crypto exchanges, major cryptocurrencies, and derivative products. Alameda
and crypto-related companies. The study concludes with an Research has maintained a crucial relationship with FTX since
outlook on the expected regulatory changes in the wake of its beginning, primarily serving as a market maker.
FTX’s collapse. Through the lens of FTX, this case study offers Run on the exchange
insightful lessons for navigating the uncharted waters of the On November 2nd, CoinDesk published a report on a leaked

*Corresponding author. Lin William Cong, E-mail: [email protected]

balance sheet (Figure 1), indicating that Alameda Research, as previously suggested by a Bloomberg article.
Sam Bankman-Fried’s crypto trading firm, heavily relied on RESULTS
FTX’s native token, FTT. This revelation led to a series of
events, with Binance CEO Changpeng Zhao announcing on Causes and consequences
November 6th the firm’s intention to liquidate its FTT holdings Several factors have contributed to the collapse of FTX:
due to unspecified “recent revelations.” In response, Bankman-
Fried reassured the public on November 7th that “FTX is fine. 1. Unsound fundamentals: FTX’s financials may have
Assets are fine.” already been in trouble, particularly after lending
money to Alameda Research to cover its losses.
However, by November 8th, FTX had experienced According to the bankruptcy filings, FTX lacked a
approximately $6 billion in withdrawals within the previous robust internal control system and failed to adequately
72 hours, as reported by Reuters. Binance also unveiled plans track funds.
to acquire FTX on the same day, but it backed away from a
nonbinding agreement to bail out FTX by November 9th. 2. Lack of regulation and monitoring on the vertical
Consequently, on November 10th, FTX suspended onboarding integration of centralized crypto exchanges: because
new clients and withdrawals until further notice. Bankman- of the nascent nature of the cryptocurrency market,
Fried informed staff that he was seeking capital, having held many centralized crypto exchanges serve multiple
talks with Justin Sun, founder of the crypto token Tron. Reuters roles, including custodian, brokerage, lender, and
reported that Bankman-Fried aimed to assemble a rescue exchange for trading cryptocurrencies. As pointed out
package worth up to $9.4 billion for FTX. as early as 2019, the unregulated vertical integration
allows centralized exchanges to manipulate transaction
On November 11th, FTX, its US unit, Alameda Research, volumes and conduct activities traditionally deemed
and nearly 130 other affiliates initiated voluntary Chapter 11 illegal in other asset markets (Cong et al., 2022).
proceedings in the United States. Subsequently, Bankman-Fried
resigned as CEO. The following day, Reuters reported that at 3. Classical bank run mechanism: Even if FTX’s balance
least $1 billion of customer funds had vanished from FTX. sheet remained sound, the exchange could still face a
FTX also stated that it had detected unauthorized transactions, crisis if everyone believed it was in trouble. As long
with block-chain analytics firms estimating outflows between as FTX lacked sufficient liquidity, it was vulnerable
$473-659 million in “suspicious circumstances.” On November to collapse. The coordination of market participants’
13th, the Bahamas securities regulator launched a probe into belief becomes especially important in new markets
the collapse of FTX, and by November 14th, U.S. prosecutors under high uncertainty (Diamond et al., 1983).
in New York were also investigating FTX’s downfall. Sam 4. Interaction between assets and liabilities: A
Bankman-Fried was arrested in the Bahamas on December 12th. significant portion of FTX’s assets and collateral
On December 13, 2022, the SEC filed a formal complaint consisted of its native token, FTT (Figure 1). A decline
against Sam Bankman-Fried, accusing him of misappropriating in the value of FTT would adversely impact the value
funds, concealing crucial information from investors and of its assets. As more customers withdrew their funds,
customers, and withdrawing money for personal use. These FTX’s financial health deteriorated, causing further
events surfaced after the CoinDesk report revealed that a declines in the FTT price and a subsequent decrease in
significant portion of Alameda’s assets consisted of FTTs and FTX’s asset value (Levine, 2022).
that FTX used FTT as collateral on their leaked balance sheet. The collapse of FTX has contagion effect to the crypto
This situation led to a conflict of interest between the two firms,

Figure 1. Balance Sheet of FTX Note: all of these are rough values, and could be slightly off; there is also obvi-
ously a chance of typos etc. They also change a bit over time as trades happen (Natan et al., 2022).
currencies and other crypto exchanges. The prices of crypto Trust. The trust’s value decreased by 20% over the two weeks
currencies dropped immediately. Bitcoin sank to its lowest preceding November 17th, and as of November 14th, Grayscale
price in two years. The cryptocurrencies, including Bitcoin Bitcoin Trust was trading at a discounted price, 42% below the
and Ethereum, had a large drop in prices. The price of Solana, value of its Bitcoin holdings.
to which Bankman-Fried has close connections, declined
Nevertheless, unlike the banking crisis (esp. Great Finance
substantially. Share prices for publicly traded cryptocurrency
Crisis in 2008), the contagion is limited to crypto industry and
companies declined, e.g., Coinbase. Moreover, crypto
does not spillover to the real economy per se, due to the limited
exchanges other than FTX also saw big withdrawals, especially
exposure of the real economy to the crypto and crypto industry
for smaller exchanges.
(Gorton et al., 2023).
DISCUSSION Regulation outlook
Figure 2 summarizes the current regulation landscape on
The collapse of FTX had a spillover effect on other crypto-
crypto in major countries. In the United States, the regulatory
related companies, with events unfolding in chronological
landscape surrounding cryptocurrency and crypto assets is
order. On November 14th, BlockFi, a cryptocurrency lender,
multifaceted yet segmented, with various federal agencies
disclosed its “significant exposure” to FTX. The company
maintaining jurisdiction over different aspects of the industry.
subsequently filed for Chapter 11 bankruptcy protection on
The Securities and Exchange Commission (SEC) regards
November 28th. On November 16th, another cryptocurrency
cryptocurrencies as securities, thus subjecting them to securities
lender, Genesis, a subsidiary of Digital Currency Group, halted
laws and regulations. Concurrently, the Commodity Futures
withdrawals. This development led Gemini, an exchange
Trading Commission (CFTC) classifies “bitcoin and other
owned by the Winklevoss twins, to cease allowing redemptions
virtual currencies” as commodities, overseeing the trading of
for clients using a service provided through a partnership
cryptocurrency derivatives accordingly (https://eur-lex.europa.
with Genesis. Meanwhile, Grayscale, another subsidiary of
eu/legal-content/EN/TXT/?uri=CELEX%3A52020PC0593).
Digital Currency Group, experienced a decline in the value
of its flagship offering, the publicly traded Grayscale Bitcoin

Figure 2. Summary of Current Regulations on Crypto Note: Table doesn’t constitute an exhaustive list of all coun-
tries/regions that regulate crypto (Natan et al., 2022).
 Furthermore, cryptocurrency exchanges, which the CONFLICT OF INTEREST
Financial Crimes Enforcement Network (FinCEN) deems
“money transmitters,” fall under the purview of the Bank The authors declare that there is no conflict of interest.
Secrecy Act (BSA) (https://www.ft.com/content/0c2a55b6-
d34c-4685-8a8d-3c9628f1f185). REFERENCES
CONCLUSION 1. Cong LW, Li X, Tang K, Yang Y (2022). Crypto Wash
Trading .
The European Union (EU) has been increasingly vigilant in
2. Diamond DW, Dybvig PH (1983). Bank runs, deposit
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legislative proposal for a regulation on markets in crypto assets
(MiCA), which is intended to create a holistic approach to the 3. FTX balance sheet, revealed.
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4. Gorton GB, Zhang J (2023). Bank Runs During Crypto
not already covered by EU law. If MiCA becomes law, it will
Winter. SSRN.
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ACKNOWLEDGEMENTS 8. Timeline-Rise and fall of crypto exchange FTX.

Reuters. 2022
The authors thank the FinTech Initiative at Cornell and
Ripple’s University Blockchain Research Initiative (UBRI) for
the generous support.