On November 11, 2022, FTX filed for Chapter 11 bankruptcy in the U.S., and its CEO Sam Bankman-Fried stepped down as CEO.
What Is FTX Exchange?
FTX Exchange was a leading centralized cryptocurrency exchange specializing in derivatives and leveraged products. Founded in 2018 by MIT graduate and former Jane Street Capital international exchange-traded funds 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 filed for Chapter 11 bankruptcy protection on November 11, 2022 and Bankman-Fried resigned. The exchange's collapse was the result of "a complete failure of corporate control," according to John J. Ray III, the new chief executive of the cryptocurrency exchange. And Ray has some experience with massive business failures: he helped manage energy trader Enron following its collapse in an accounting scandal in 2001.
A series of investigations and lawsuits have ensued. 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."
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.
- FTX was a centralized cryptocurrency exchange specializing in derivatives and leveraged products. It supported most commonly traded cryptocurrencies.
- FTX's key product offerings included futures, leveraged tokens, options, MOVE contracts, and spot markets.
- FTX was based in the Bahamas and did not serve U.S. residents, who can trade on FTX US instead.
The FTX Collapse
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 will likely impact cryptocurrencies well into the future and drag down broader markets. On November 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 country. Other 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, Gemini crypto exchange, and BlockFi, a crypto lending platform with significant exposure to FTX, have all been impacted by the FTX bankruptcy. The lending unit of cryptocurrency investment bank Genesis suspended redemptions and new loans due to the collapse of FTX on November 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.
On Nov. 18, The Securities Commission of the Bahamas took control of cryptocurrency assets held by bankrupt exchange FTX. The U.S. House Financial Services Committee said it will hold a hearing in December 2022 on the FTX collapse.
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, from beginners to seasoned professionals or, 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 Argentinian peso. The Turkish lira and Japanese yen also have restricted usage, with the Hong Kong dollar, Singapore dollar, and South African rand having functionality soon.
FTX US 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 over 100 quarterly and perpetual futures pairs with margins of up to 101x. Stablecoins, such as USD and tether (USDT), are 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 rallies 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.
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.
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 headquartered 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 does not 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 USD 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 solution that monitors for large deposits or unusual activity.
FTX also managed a FTX Backstop Liquidity Fund to ensure liquid assets are 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 log-in can be designated as read-only (can not 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 have overlapping management teams. Both companies listed Sam 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 United States. 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 to other cryptocurrency exchanges. The exchange also boasted its 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 VIP 1 (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 hold FTT. Holding $10,000 worth of FTT yielded a 15% discount on fees, while holding $100,000 of FTT yields 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 height, there were several potential downsides to the exchange. FTX encouraged its users to ask for help using support tickets; for those preferring 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 find 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 boasted 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/sell NFTs.
Why Is FTX Not Allowed in the United States?
FTX did not permit residents of the United States to trade on its platform. This was in response to strict regulation for the cryptocurrency industry. Most recently, in August 2022, the FDIC served FTX US a cease and desist letter to FTX citing the company potentially having made false and misleading statements in violation of the FDIC Act.
The Bottom Line
FTX was a widely-known and heavily-used cryptocurrency exchange allowing users to buy, sell, and enter into derivative contracts for coins and tokens. FTX also promoted transactions for NFT and collectibles. Though not available to U.S. residents due to cryptocurrency regulation, the company provided an opportunity for traders around the world to exchange hundreds of digital currencies for relatively low fees, until it went bankrupt, got hacked, the CEO stepped down and got sued, and investigations began into the exchange as a Ponzi scheme.