The FTX Cryptocurrency Failure: What Is It, and What Went Wrong?

photo of various crypto types for ftx cryptocurrency blog post
How and why did the FTX cryptocurrency platform collapse?

You may have heard about the collapse of FTX in late 2022, but unless you were personally impacted or know a lot about cryptocurrency, you might not know the particulars of what the FTX cryptocurrency exchange is, and how it failed so spectacularly, so quickly. 

What is the FTX Cryptocurrency Exchange?

FTX is a company that previously acted as a cryptocurrency exchange and crypto hedge fund. People were able to buy and sell cryptocurrency digital assets like bitcoin and dogecoin there, according to NBC News.

Sam Bankman-Fried, also known as SBF, is the founder and previous CEO of FTX. In late 2017, he cofounded Alameda Research, a crypto hedge fund, and later created the crypto exchange FTX, in 2019.

Crypto really started to take off around the time FTX was started, and venture capitalists invested billions into cryptocurrency – almost $2 billion was invested by venture capital groups into FTX alone, NBC reported.

Before long, however, the crypto industry started to wane, and major cryptocurrency values dropped dramatically. 

What Happened to FTX?

FTX collapsed over a 10-day period in November 2022. 

On November 2nd, cryptocurrency news site CoinDesk revealed that Alameda Research “held a position valued at $5 billion in FTT, the native token of FTX” and “disclosed that Alameda’s investment foundation was also in FTT, the token that its sister company had invented, not a fiat currency or other cryptocurrency,” Investopedia reported. That led to concerns about Bankman-Fried’s companies’ undisclosed leverage and solvency.

After Alameda’s balance sheet was revealed, Changpeng “CZ’’ Zhao, the CEO of the crypto platform Binance, announced on November 6 that his company would sell off all its FTT tokens. That led to a major FTT price drop, and FTX customers started to withdraw their assets from the exchange.

The value of FTT fell more than 80 percent in two days, and on November 8, FTX stopped letting its customers take money out of the platform. That same day, Binance announced that it had reached a nonbinding agreement to buy the non-U.S. business of FTX for an undisclosed amount, but backed out the next day, citing reports that FTX had mismanaged user funds.

On November 10, the Bahamas’ securities regulator froze the assets of FTX Digital Markets, FTX’s Bahamian subsidiary, and the California Department of Financial Protection and Innovation announced an investigation into FTX, Investopedia reported. 

On November 11, Bankman-Fried stepped down as CEO of FTX, replaced by court-appointed FTX CEO John Ray, and FTX filed for Chapter 11 bankruptcy protection the same day.

Continuing FTX Issues

Just hours after filing for bankruptcy, FTX claimed to be the victim of “unauthorized transactions” and announced it would move its digital assets to cold storage for security purposes. A suspected $477 million was stolen from FTX in the alleged hack, according to outside analysts.

Then, on November 16, a class action lawsuit was filed in a Florida federal court, alleging that Bankman-Fried created a fraudulent cryptocurrency scheme that targeted specific groups called “unsophisticated investors” for the exchange.

Several celebrities and other famous personalities who endorsed the platform were named in the lawsuit, including Steph Curry, Shaquille O’Neal, Naomi Osaka, Kevin O’Leary, Larry David, and Tom Brady. 

Notably, one of the attorneys behind the lawsuits, Adam Moskowitz, revealed on an episode of The Scoop podcast with Frank Chaparro on April 19 that Taylor Swift was among those approached to endorse the platform, but ultimately did not pursue the deal after asking, “Can you tell me that these are not unregistered securities?”

In December, Bankman-Fried was extradited to the U.S., and in January, he pleaded innocent to all criminal charges. 

Contact Phillips Law Group for FTX and Cryptocurrency Cases

The collapse of FTX left countless customers unable to withdraw their funds and in dire financial straits after the exchange’s mismanagement. If you or a loved one was impacted by the collapse of FTX, you could be eligible for financial compensation.

Lawsuits accusing the celebrities involved of promoting an unregistered security and looking to recover damages for customers are ongoing, and the team at Phillips Law Group may be able to help you if you were affected. 

Please contact our firm today for a free, no-obligation consultation to discuss your potential case and legal options. Call us at (602) 222-2222 or fill out the contact form on this page to learn more.