Former FTX CEO Sam Bankman-Fried on Jan. 3 pleaded not guilty to criminal charges of fraud, conspiracy, campaign finance law violations, and money laundering in a New York federal court, setting up a legal battle with his former business partners. He is set for trial on Oct. 2. If convicted, Bankman-Fried could face up to 115 years in jail.
What Is FTX Exchange?
FTX Exchange was a leading centralized cryptocurrency exchange, the world's third-largest in July 2021, specializing in derivatives and leveraged products. Founded in 2018 by Massachusetts Institute of Technology (MIT) graduate and former Jane Street Capital international exchange-traded funds (ETFs) trader Sam Bankman-Fried, FTX offered a range of trading products, including derivatives, options, volatility products, and leveraged tokens.
It also provided spot markets in more than 300 cryptocurrency trading pairs such as BTC/USDT, ETH/USDT, XRP/USDT, and its native token FTT/USDT. In early November 2022, the exchange and the companies in its orbit began a steep fall from grace.
Bahamas-based FTX and its FTX US affiliate had overlapping management teams but separate capital structures. U.S. residents could only trade through FTX US.
- FTX was a centralized cryptocurrency exchange specializing in derivatives and leveraged products that filed for bankruptcy protection in the U.S. in November 2022.
- FTX's founder and former CEO was arrested in the Bahamas, extradited to the U.S. and released on a $250 bond in late December. He awaits trial on criminal charges in October.
- FTX supported most commonly traded cryptocurrencies.
- FTX's key product offerings included futures, leveraged tokens, options, MOVE contracts, and spot markets.
FTX Bankruptcy Filing
FTX filed for Chapter 11 bankruptcy protection on Nov. 11, 2022, and Bankman-Fried resigned. According to its bankruptcy filing, FTX, which was once valued at $32 billion and has $8 billion of liabilities it can't pay to as many as 1 million creditors.
The exchange's collapse was the result of "a complete failure of corporate control," according to John J. Ray III, the new, court-appointed chief executive of FTX. Ray, who has experience with massive business failures such as energy trader Enron following its collapse in an accounting scandal in 2001, told a U.S. House of Representatives committee hearing on Dec. 13, 2022, that FTX appeared to be a case of "old-fashioned embezzlement," and that investors and creditors are unlikely to get all their money back.
Former FTX CEO's Indictment
The U.S. Attorney for the Southern District of New York, Damian Williams, announced on Dec. 13 an eight-point fraud indictment against Bankman-Fried that alleges the former CEO defrauded customers and investors of FTX and lenders to FTX-affiliated hedge fund Alameda Research and violated campaign finance laws. He added that it was one of the "biggest frauds in financial history.
Bankman-Fried was indicted by the U.S. District Court in Manhattan on eight counts, including securities fraud and money laundering. Following a court hearing on Dec. 22, a federal judge decided to release Bankman-Fried from custody after his attorneys and federal prosecutors agreed to a $250 million bond, the largest in history.
The 30-year-old former crypto executive will live with his Stanford law professor parents in Palo Alto, California, be confined to the Northern California area, wear an electronic monitoring bracelet, and submit to mental health and substance abuse counseling.
On Jan. 3, Bankman-Fried pleaded not guilty to all charges in a New York federal court. His trial date was set for Oct. 2.
Investigations, Lawsuits Continue
A series of investigations and lawsuits are continuing in early 2023. Regulators are looking into whether FTX used customer funds to prop up Alameda Research, a trading firm founded and almost entirely owned by Bankman-Fried. In an interview with The New York Times after his resignation, Bankman-Fried said he was unaware of how much Alameda had borrowed from FTX. In separate comments to a Vox reporter, he expressed regret over filing for bankruptcy, noting that regulators "make everything worse."
The FTX Collapse's Fallout
FTX's collapse shook the volatile crypto market, which lost billions in value, dropping below $1 trillion.
The consequences of FTX's rapid decline and collapse likely will affect cryptocurrencies well into the future and could drag down broader markets.
On Nov. 16, a class-action lawsuit was filed in a Florida federal court, alleging that Sam Bankman-Fried created a fraudulent cryptocurrency scheme designed to take advantage of unsophisticated investors from across the U.S. Celebrities named in the lawsuit include Steph Curry, Shaquille O'Neal, Shohei Ohtani, Naomi Osaka, Larry David, and Kevin O'Leary who allegedly helped Bankman-Fried facilitate the plan.
Genesis Global Capital, the Gemini crypto exchange, and BlockFi, a crypto lending platform with significant exposure to FTX, have all been affected by the FTX bankruptcy. The lending unit of cryptocurrency investment bank Genesis suspended redemptions and new loans due to the collapse of FTX on Nov. 16. Following the news, Gemini, the crypto exchange founded by the Winklevoss twins, announced delays in withdrawals from its Earn product, in which Genesis is a lending partner. BlockFi, a crypto lending platform with significant exposure to FTX, suspended withdrawals and, on Nov. 28, filed for bankruptcy.
Interview With NYT's Sorkin and Reaction
In a wide-ranging interview with New York Times columnist Andrew Ross Sorkin at the DealBook Summit on Nov. 30, Bankman-Fried said that FTX's collapse stemmed from sloppy accounting and a market crash and not from criminal activity. The former CEO joined the summit virtually from the Bahamas, FTX's base, and said his participation was against the advice of his lawyers.
FTX was once valued at $32 billion and now is worthless in bankruptcy. Many billions are owed to creditors.
In general, during the interview Bankman-Fried feigned ignorance of what was going on between FTX and Alameda Research, its trading arm, and said he neither oversaw compliance of the two entities, nor appointed an officer to do so—a failure he said he now regrets.
To Sorkin's question of whether Bankman-Fried commingled the funds of FTX and Alameda Research, the former CEO said he didn't "knowingly commingle" funds. In an online panel on CoinDesk following the interview, Lawrence Lewitinn, the editor at large, questioned the veracity of Bankman-Fried's response and said when funds are commingled, it's a deliberate action and doesn't occur by happenstance.
Basics of FTX Exchange
In the beginning, FTX's wide range of products and easy-to-use desktop and mobile trading apps drew crypto investors of all skill levels, in crypto jargon, from newbies to whales. The FTX platform offered a comprehensive range of order types, from basic market orders to more complex trailing stop orders.
FTX supported nine fiat currencies that investors could deposit and withdraw via a wire transfer: the U.S. dollar, euro, British pound, Australian dollar, Canadian dollar, Swiss franc, Brazilian real, Ghanaian cedi, and Argentine peso. The Turkish lira and Japanese yen also had restricted usage, with the Hong Kong dollar, Singapore dollar, and South African rand functionality promised soon.
FTX U.S. customers were required to verify their identities to qualify for full access under know your customer (KYC) rules. KYC Tier 1 customers were limited to single deposits of $2,999, ACH deposits of $500 for any rolling 10-day period, and a lifetime limit on withdrawals of $300,000. KYC Tier 2 customers were limited to single deposits of $20,000, ACH deposits of up to $30,000 per 10-day rolling period, and are not subject to daily or lifetime withdrawal limits.
FTX Key Products
FTX's key products included futures, leveraged tokens, options, MOVE, and spot markets.
Futures: Traders could take both long and short bets on leading cryptocurrencies using more than 100 quarterly and perpetual futures pairs with margins of up to 101x. Stablecoins, such as USD and tether (USDT), were used as collateral to open and maintain positions.
Leveraged Tokens: FTX offered ERC20-based tokens that provided traders up to 3x leveraged exposure against the underlying trading pair. For instance, if a trader opened a BULL/USD - 3x long Bitcoin token and Bitcoin rallied 10% from the time of purchase, the leveraged token would gain 30%. FTX's leveraged tokens had no margin requirement.
Options: Traders could speculate on future price direction and hedge against their open positions with a range of call and put options that gave the holder the right but not the obligation to buy or sell at a future strike price.
MOVE: These contracts allowed traders to bet how far the price of a cryptocurrency would move over a time period, irrespective of the direction, essentially making them a play on volatility. As long as the price of the underlying cryptocurrency moved over a specific dollar amount—either up or down—the contract generated a profit.
Spot Markets: FTX offered more than 100 different spot trading pairs, providing exposure to leading cryptocurrencies such as Bitcoin, Ethereum, Binance Coin, Chainlink, and Ripple's XRP.
FTX US offered nearly 60 cryptocurrency and currency spot trading pairs, along with options contracts denominated in 0.01 Bitcoin and 0.1 Ether, cryptocurrency swaps, and Bitcoin mini futures. It also operated a marketplace for non-fungible tokens (NFTs).
FTX offered futures pairs with margins up to 101x to long or short leading cryptocurrencies, allowing traders to take advantage of comparatively small price movements.
FTX was incorporated in Antigua and Barbuda and had its headquarters in the Bahamas after moving from Hong Kong in September 2021. Its FTX Digital Markets Ltd. unit is regulated by the Securities Commission of the Bahamas. The exchange doesn't offer services to U.S. residents.
U.S.-based crypto traders could access FTX US—a registered money services business with FinCEN. In October 2021 FTX US completed its acquisition of LedgerX, rebranding it as FTX US Derivatives. FTX US Derivatives is licensed as Derivatives Clearing Organization, Swap Execution Facility and Designated Contract Market by the U.S. Commodity Futures Trading Commission (CFTC).
FTX competitive futures and spot markets trading fees ranged from 0.04% to 0.07% for market takers, based on the maker and taker model, as of September 2022. Meanwhile, leveraged tokens carried a creation and redemption fee of 0.10% and a daily management fee of 0.03%.
FTX didn't charge deposit or withdrawal fees for most crypto assets. All bitcoin withdrawals greater than 0.01 bitcoin were free, as was one withdrawal of less than 0.01 bitcoin per day. Additional small bitcoin withdrawals were charged a 0.1% fee. Fiat currency withdrawals valued at more than $5,000 were free, as was one withdrawal per week below that amount.
FTX US trading fees for market takers ranged from 0.05% to 0.2% as of September 2022. Fiat currency deposits could be made via wire transfer, ACH, debit or credit card, and Silvergate Exchange Network, all of which (except for debit and credit cards) could be used to withdraw fiat currency. Wire transfer withdrawals over $5,000 USD were free. One withdrawal per week below that amount was also free, but subsequent wires incurred a $25 fee. There were no deposit fees for blockchain transfers. FTX US paid the withdrawal blockchain fees for all tokens except ERC20/ETH and small bitcoin withdrawals.
Non-fungible token (NFT) fees varied on the platform and location of the trade. For FTX US users, it cost $1 to list an NFT using its self-service tool and 2% charged to the seller from each sale or trade. Alternatively, FTX (the non-US platform) charged 5% fees to the buyer and seller on each side of the trade.
FTX boasted risk management features across three primary areas: personal accounts, exchanges, and other security areas.
Personal Account Security
To register an FTX account, the company required a combination that adheres to complex character requirements. In addition, it scanned password requests for predictable patterns; any account not compliant was not allowed to register.
In addition, FTX required users to set up two-factor authentication (2FA). 2FA was required for all withdrawals. In addition, FTX locked withdrawals for an account should an account remove 2FA contact information or if the account's password was changed.
FTX monitored and tracked user activity for suspicious behavior. Should FTX see an unusual login attempt, FTX notified the account owner for further verification to be successfully logged in.
FTX contracted with Chainanalysis to identify potentially suspicious trading activity. Chainanalysis is a real-time, anti-money laundering compliance service that monitors for large deposits or unusual activity.
FTX also managed a FTX Backstop Liquidity Fund to ensure liquid assets were on hand to facilitate trading. As of September 2022, FTX's liquidity fund balance was approximately $200 million.
Other Security Features
FTX allowed users to create custom logins through the use of subaccounts. Subaccounts allow multiple people to access the same account; however, each user will have configurable and customizable permission levels. Each login can be designated as read-only (can't make any trades but can view historical activity). In addition, different logins can have varying degrees of withdrawal capabilities.
FTX also allowed users to define security permissions regarding internet protocols (IPs) or wallet addresses. This ensures that only specified internet addresses or wallets could transact in relation to a specific account.
Management and Capital Structures
FTX and FTX US had overlapping management teams. Both companies listed Bankman-Fried as chief executive officer and co-founder Gary Wang as chief technology officer.
FTX closed a $400 million series C venture capital funding round in January 2022 valuing the company at $32 billion. Participating investors included Temasek, Paradigm, Ontario Teachers' Pension Plan Board, NEA, IVP, SoftBank Vision Fund 2, Lightspeed Venture Partners, Steadview Capital, Tiger Global, and Insight Partners. All investors involved in that funding round simultaneously participated in a series A funding round for FTX US valuing that company at $8 billion.
FTX Exchange was not regulated in the U.S. U.S.-based traders could only access partner entity FTX US.
As part of their marketing efforts, the parent companies of FTX and FTX US in September 2021 signed Golden State Warriors point guard Stephen Curry to a long-term promotional partnership, providing the NBA star an equity stake in FTX.
In August 2021, the same companies announced a long-term promotional partnership with venture capitalist and television personality Kevin O'Leary providing the "Shark Tank" host equity stakes in FTX and FTX US along with pay in cryptocurrency.
Per FTX's website, the company "is proud to partner with the world's most exciting teams, properties, and heroes of their trade to amplify crypto education, involvement, and community impact." As of September 2022, additional partnerships included Major League Baseball, FTX Arena and the Miami Heat, Shaquille O'Neal, and FTX Field (University of California-Berkeley).
Pros and Cons of FTX Exchange
Advantages of FTX Exchange
FTX offered reasonable trading fees compared with other cryptocurrency exchanges. The exchange also boasted a mobile app, advanced trading opportunities, and trading opportunities for hundreds of different coins or tokens.
FTX had several incentives as part of its VIP Program based on exchange volume. For example, entities classified as VIP1 (with a total volume of 0.1% of exchange volume) had taker fees of 0.0375%. This could improve to VIP7 (with a total volume of 2.5% of exchange volume), which reduced taker fees to 0.025%. A similar tier system existed for market makers.
In addition, there were further benefits when these entities held FTT. Holding $10,000 worth of FTT yielded a 15% discount on fees, while holding $100,000 of FTT yielded a discount of 25%.
FTX offered users a unique affiliate link. When new users signed up using that affiliate link, the referring user received between 25% and 40% of the new user's fees, depending on the amount of FTT staked. In addition, they got 5% of their fees back. FTX reserved the right to reward users with additional compensation based on the number of referrals, volume generated by users, or other criteria.
Disadvantages of FTX Exchange
Even at its peak, there were several potential downsides to the exchange. FTX encouraged its users to ask for help using support tickets; for investors who prefer more direct contact such as live chat support, other exchanges may be more suitable. In addition, the FTX global platform could not be used by U.S. residents. Instead, residents of the U.S. used FTX US for regulatory reasons.
Though FTX offered a great range of trading products, some beginners in the space may have found the interface or options overwhelming. FTX was often considered a leading option for more experienced traders, while it may have been less suitable for beginners. Though FTX offered low trading fees, there were often lower fees to be had on other exchanges.
What Did FTX Do?
FTX was a cryptocurrency exchange that promotes the liquidity and transacting of coins and tokens. FTX allowed users to connect their wallets, place trades, exchange digital currencies, enter into derivative contracts, or buy and sell NFTs.
Why Was FTX Not Allowed in the U.S.?
FTX did not permit residents of the U.S. to trade on its platform. This was in response to strict regulation for the cryptocurrency industry. In August 2022, the Federal Deposit Insurance Corporation (FDIC) served FTX US a cease-and-desist letter citing the company for potentially having made false and misleading statements in violation of the FDIC Improvement Act.
The Bottom Line
FTX was a widely known and heavily used cryptocurrency exchange that allowed users to buy, sell, and enter into derivative contracts for coins and tokens. FTX also promoted transactions for NFTs and collectibles. Though not available to U.S. residents due to cryptocurrency regulation, the platform provided an opportunity for traders around the world to exchange hundreds of digital currencies for relatively low fees—until it went bankrupt, got hacked, its CEO stepped down and was arrested, and investigations began into the exchange as a Ponzi scheme.