FTX, which stands for Futures Exchange, appeared to be a major success story in cryptocurrency just a few months ago until it all fell apart.
It is one of the largest exchanges where digital assets are traded. Regulators and market observers have lauded it as one of the most transparent crypto operations. So why is it now facing bankruptcy after reportedly owing creditors more than $10 billion?
Sam Bankman-Fried, a mathematics graduate from the Massachusetts Institute of Technology, co-founded Alameda Research, a small trading firm that marked the beginning of his cryptocurrency empire in 2017.
The primary way that Alameda made money was straightforward: it bought Bitcoin and other cryptocurrencies in one part of the world and sold them in another, pocketing the difference.
Alameda’s need for funds to run its trading business was the main reason Bankman-Fried created FTX in 2019. FTX moved from Hong Kong to the Bahamas. It marketed itself aggressively to ordinary investors eager to trade the hot new thing.
Two things enabled the catastrophe with FTX: it was crypto and it wasn’t public in any fashion. The promoters raised billions without public disclosure and strict accountability. In parallel with past financial crises, even the audit groups that were supposed to scrutinise the FTX books are looking shaky.
The bankruptcy of FTX again shows that the bursting of speculative bubbles can often be attributed to the lack of effective regulatory oversight, coupled with ambitious start-up founders flush with venture capital money and few internal controls.
John Jay Ray is a prominent restructuring lawyer now in charge of handling the clean-up of FTX. He called the FTX situation “unprecedented” in a US bankruptcy court filing. He blasted the company for the “concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals”.
The Bankman-Fried empire comprised about 130 affiliated companies. Protos.com is an independent news portal for crypto investors.
A few days ago, Times of Malta reported how in April this year, Bankman-Fried opened two companies in Malta: FTX Malta Holdings Ltd and FTX Gaming Services Ltd.
Cryto website Protos, which also reported on the Malta-based firms added: “Malta is a popular jurisdiction for online gaming companies, so it is no surprise that Bankman-Fried might consider opening a gaming company there, especially given the tax benefits.”
Protos gives an insight into how shady speculators try to project an image of respectability with regulators. It revealed that the chairman of the autonomous entity Eastern Caribbean Securities Regulatory Commission, Arthur Thomas, was one of the three directors of FTX Malta, along with Bankman-Fried and former HSBC executive Jonathan Innes Cheesman.
The Malta Gaming Authority and the MFSA confirmed that they never granted a gaming licence or a financial services licence to the FTX companies registered in Malta.
Still, one needs to ask what due diligence was carried out before these companies were registered in Malta by the Malta Business Registry. Is this a case where Malta’s reputation has been saved by the bell that rang loudly when the FTX empire collapsed?
This is not the first, or even the last, speculative bubble that has burst, leaving many investors out of pocket.
Financial alchemists have proved to be very good at selling their spin to investors and their dud ideas to politicians.
Once again, we sadly see how money and power are two sides of the same coin.