On Nov. 11, while the rest of the country was celebrating Veteran’s Day, Sam Bankman-Fried announced that FTX — one of the world’s largest cryptocurre
On Nov. 11, while the rest of the country was celebrating Veteran’s Day, Sam Bankman-Fried announced that FTX — one of the world’s largest cryptocurrency exchanges by volume — had filed for bankruptcy. Lawmakers and pundits quickly latched onto the rapid disintegration of FTX to call for more regulation of the crypto industry. “The most recent news further underscores these concerns [about consumer harm] and highlights why prudent regulation of cryptocurrencies is indeed needed,” said White House Press Secretary Karine Jean-Pierre.
It remains unclear what exactly transpired at FTX. Reports indicating that between $1 billion and $2 billion of customer funds are unaccounted for are deeply troubling. Widespread consumer harm and indications of corporate impropriety only increase the likelihood that Congress will take action to regulate the crypto industry. As Congress looks toward overhauling the regulatory environment around crypto, it is important that lawmakers provide regulatory clarity without hindering positive innovation.
Anatomy of a collapse
Sam Bankman-Fried was once the golden boy of the crypto world. Launching his career in traditional proprietary trading at Jane Street, Bankman-Fried left Wall Street and founded a crypto-focused quantitative trading firm called Alameda Research in November 2017. Three months later, he rose to fame by being the first to significantly profit by arbitraging the difference in the price of Bitcoin in Japan and the United States, purportedly earning him and his team $25 million per day. Just over a year later, he founded FTX. One needs only read the laudatory, now-deleted profile of Bankman-Fried from Sequoia Capital (which invested $214 million in FTX) to see how many believed him to be a financial savant.
Bankman-Fried eventually left Alameda to focus on FTX while retaining a significant stake in the fund. FTX quickly grew to become one of the largest crypto exchanges in the world as revenues grew over 1000% between 2020 and 2021. In January, FTX was valued at $32 billion. But, on Nov. 2, leaked documents indicated that Alameda Research held a large about of FTX Tokens (FTT). Four days later, Changpeng “CZ” Zhao — CEO of rival exchange Binance — tweeted that his company would liquidate approximately $2.1 billion worth of FTT. CZ’s statements, coupled with fears of illiquidity, led to a classic bank run on FTX.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ Binance (@cz_binance) November 6, 2022
Faced with a liquidity crisis, FTX and Binance agreed to an acquisition. But, “as a result of corporate due diligence,” Binance backed out of the deal. Over the next 48 hours, Bankman-Fried deleted assurances that “assets are fine,” asked investors for $8 billion to save his company and apologized.
1) I’m sorry. That’s the biggest thing.
I fucked up, and should have done better.
— SBF (@SBF_FTX) November 10, 2022
On Nov. 11, Bankman-Fried announced that FTX, FTX.US, Alameda Research and around 130 other affiliated companies had filed for Chapter 11 bankruptcy.
1) Hi all:
Today, I filed FTX, FTX US, and Alameda for voluntary Chapter 11 proceedings in the US.
— SBF (@SBF_FTX) November 11, 2022
The impact of FTX’s collapse on consumers is devastating. Court filings show that the FTX Group could have “over one million creditors in these Chapter 11 cases,” and legal experts have asserted that many customers may never get their money back. Following the departure of Bankman-Fried, FTX appointed John J. Ray III — the lawyer who managed the liquidation of Enron Corp. following its demise — to oversee the bankruptcy proceedings.
Fallout in Washington, D.C.
Over the last few years in Washington, crypto regulation has largely been considered a “pre-partisan” issue that cuts across political lines in ways that few issues can. It is widely acknowledged by lawmakers, regulators and the industry that crypto and blockchain technologies do not fit cleanly into existing regulatory structures, leaving much of the industry in a regulatory gray area and leading to what many have complained is regulation through enforcement. These complaints have led lawmakers to push for new legislation that aims at clarifying the rules of the road for crypto.
While there are numerous smaller pieces of legislation that have been put forward, there are two major bills that seek to provide clarity for the crypto industry. The Lummis-Gillibrand Responsible Financial Innovation Act delineates the jurisdiction over digital assets between the Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC), allow exchanges to register with the CFTC, and create new requirements for stablecoin providers, among other things. The Digital…
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