A recently published article on Substack titled “FTX Pre-Mortem Overview” by the embattled former CEO of FTX, Sam Bankman-Fried (SBF), examines the factors that led to the demise of FTX, previously one of the biggest cryptocurrency exchanges.
With adverse news regularly coming out about the probable causes of FTX’s failure (in particular, from the U.S. bankruptcy team led by John Ray), he used the article to present his own side of the story. It was nevertheless a surprising move given the ongoing criminal case against him. In this piece, we analyze SBF’s account of events.
According to Bankman-Fried, the exchange filed for bankruptcy due to various reasons, including the abrupt and unanticipated decline in the cryptocurrency market, referred to as “crypto winter,” which began in 2022.
This market crash significantly impacted many exchanges, but FTX was particularly hard hit due to internal factors that made it more susceptible to market fluctuations.
Bankman-Fried, the former CEO of FTX, clarified that recent speculation surrounding the company’s solvency is not regarding FTX US but rather FTX International.
He emphasized that FTX US has always been fully solvent and has never had any issues with solvency. He stated, “When I transferred the management of FTX US to Mr. Ray and the Chapter 11 team, the company had a net cash on hand of over $350 million beyond customer balances.”
He further clarified that the funds and customers of FTX US were completely segregated from those of FTX International.
Bankman-Fried expressed frustration with the fact that FTX US users have not yet been able to retrieve their funds, calling the delay “ridiculous.”
He assured that the company is working diligently to resolve the issue and return funds to affected users as soon as possible. He also stated that FTX International and Alameda Research were independent businesses making money on their own.
However, given the level of commingling of assets that appears to have occurred between the two firms (both founded by SBF), as well as the obvious contagion risk that eventually came home to roost, many will disagree with his claim that FTX was run independently from Alameda.
Three Causes of FTX’s Implosion
According to SBF, three independent factors led to the implosion of Alameda Research.
- Firstly, throughout 2021, Alameda saw significant growth in its financial position, as reflected in its balance sheet. The company’s net asset value had reached an impressive $100 billion, with a net borrowing of $8 billion (leverage) and available liquidity of $7 billion.
- Secondly, Alameda failed to take necessary precautions to safeguard its financial assets from market fluctuations. As the year 2022 progressed, a series of devastating market crashes occurred, impacting both traditional stocks and the cryptocurrency market. These crashes devastated Alameda’s finances, leading to a staggering decrease of nearly 80% in the value of its assets.
- Thirdly, SBF alleges that the actions and comments by the CEO of Binance, Changpeng “CZ’ Zhao, caused major setbacks for Alameda Research’s finances.
Bankman-Fried denied any accusations of stealing funds and stated that he did not stash billions away. He emphasized that nearly all of his assets were, and still are, utilizable to backstop FTX customers.
For example, he mentioned that he had offered to contribute nearly all of his shares in Robinhood to customers or even 100% if the Chapter 11 team would honor his D&O legal expense indemnification.
He added that he is committed to ensuring the customers are protected and willing to go above and beyond to make that happen. Furthermore, he said he would cooperate with any investigations and provide the necessary information to clear his name and reputation.
He further explained that his consumption was a minuscule portion of his earnings. He stated that his overall consumption, charitable donations, and investments were not only less than his earnings but were also sourced from them.
Additionally, SBF stated that the sponsorships and company real estate associated with FTX were significantly less than its revenue and the amount it raised through various means. He emphasized the company’s strong financial standing and commitment to responsible spending.
The Collapse of Crypto Firms Caused More Problems for the Crypto Industry
SBF further emphasized that the collapse of firms like Three Arrows Capital in the spring of 2022 had a dire impact on the entire crypto market. This event caused a ripple effect, leading to a significant decline in the value of nearly every major digital asset, including Bitcoin, Solana, and other prominent tokens.
The overall market outlook became gloomy, and asset values dropped sharply, leaving many investors concerned and uncertain about the future of the crypto market.
This event highlighted the interconnectedness of the crypto market and how a single event can lead to a chain reaction that impacts the entire market. The downfall of Three Arrows Capital resulted from significant losses that not only impacted the company but also had a ripple effect on other entities such as Voyager and others.
The situation was further exacerbated by the substantial depreciation of assets experienced by Alameda Research, which resulted in an 80% loss in value, eventually leading to the collapse of FTX as well.
However, it should be noted that the accuracy of these figures should be taken with a grain of salt as the author (SBF) does not have access to the relevant records for a more thorough analysis.
FTX US Still Solvent, Claims SBF
Despite recent concerns about the financial stability of FTX US, customers can still receive substantial reimbursement. The parent company, FTX International, holds a substantial amount of assets valued at billions of dollars.
SBF has, however, emphasized that a significant portion of these assets will be allocated toward compensating affected customers.
However, despite facing eight counts of wire fraud and conspiracy, Sam Bankman-Fried entered a plea of not guilty on January 3, 2023. This update comes as the trial date for this case is expected to begin in October.
Adding to the complexity of the situation, former CTO Gary Wang and Alameda’s Caroline Ellison, who both admitted guilt to the charges, are expected to testify against Bankman-Fried during the trial.
This development raises questions about the evidence against him and makes the trial’s outcome unpredictable. It is clear that the industry is closely watching this case, and it could have far-reaching implications for the crypto space.
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