The Breath of Failure: FTX Scandal
Photos from Pexels by David McBee
Raj Ramanathan
The idea was said to be the future, in which cash and credit were only believed to be a contemporary part of society. Investors and common citizens were euphoric over the shiny new idea, yet all over the world people shunned the risk. One man, one company, and one app had investors through the roof; however, as history tells its tale, a man who had everything flew too close to the sun and fell beyond belief. The present-day Icarus is similar to the man Sam Bankman-Fried, the CEO of the cryptocurrency trading app FTX.
FTX had been on the rise for three years and became the second most popular trading app. All it took was a matter of days, and as of November 11, FTX has fallen to bits. A company that was valued at 30.1 Billion dollars had filed for bankruptcy under Chapter 15. With all the questions on who, what, when, where, why, and how, we look at the scandal of FTX.
Although Bankruptcy is commonly known the individual chapters are not, to get a clearer idea we need to understand what Chapter 15 truly means. The company operated by Sam Bankman- Fried had an astronomical number of debtors and is not only in one country. Having over 100,000 debtors and foreign parties involved caused complications. Not only are there a high number of debtors but there is a sizable quantity of high-profile investors, these investors include Tom Brady, Larry David, and Steph Curry.
The reason behind what really happened to the company and Sam will never be 100% known however we can still ponder upon the idea of what happened.
The suspected scandal is between two Sam Bankman-Fried (SBF) companies: Almeda and FTX. They are two separate companies but when a financial document leaked, suspicion arose when looking at how both companies operated. FTX is a crypto exchange in which people can buy, sell, and trade different online currencies. On the other hand, Almeda’s business plan was simple: they bought crypto in parts of the world and sold it in others, pocketing the difference.
Almeda’s simple business plan stretched the company too thin as it had no regulatory spending limit. As a result of no spending limit, Almeda needed money in order to keep the business afloat, hence SBF created a trading token on FTX called FTT.
This coin was mainly marketed and controlled by Almeda as they controlled and set the price for the token, directing traffic toward their business. To give FTT the edge, they gave customers the ability to liquidate their FTT in case of emergency. In order to keep functioning, Almeda needed money. To get a loan processed, they used their FTT tokens as collateral. Since Almeda is a private entity they were able to raise billions without public disclosure.
Almeda and FTX had been performing at a high level for a while now, but in the Spring of 2022 many crypto businesses failed and a large sum of them were related to Almeda and FTX.
Due to the collapse, FTT’s value had tanked severely, causing debtors to ask for higher interest rates or revoke their funds. To keep funding Almeda, Sam used an excess of 10 Billion dollars from customers who invested in FTX to pay for the large debt that Almeda had.
This information was ultimately leaked in the financial statement previously mentioned causing panic among the investors which led FTX to file for bankruptcy. This incident may forever destroy the trust that people once had in cryptocurrency.
The 30-year-old CEO has always been in the spotlight when it comes to young entrepreneurs, but as FTX and Almeda’s restructuring lawyer, John J. Ray, put it, “This may be the biggest business mistake I have ever encountered.”
