The collapse of cryptocurrency exchange FTX raises problems for all of the crypto community
The dramatic and still evolving collapse of cryptocurrency exchange FTX and founder (and now former CEO) Sam Bankman-Fried has sent shockwaves through the crypto communities. With allegations of misuse of customer funds and potential fraud — plus the unresolved issue of missing (possibly stolen) millions — the ongoing FTX saga raises troubling questions about crypto’s future.
To make sense of FTX’s collapse, it’s useful to understand how a cryptocurrency exchange like FTX works – or, rather, how one’s supposed to work.
As the name suggests, exchanges facilitate the trading of cryptocurrencies. As a part of this service, crypto exchanges also offer functions vaguely similar to bank accounts, offering ‘digital wallets’ in which users can store their crypto assets. Like a bank account, users hold their crypto assets in these wallets until they are prepared to sell them on the always-fluctuating market, then purchase more cryptocurrency or just take the ‘real money’ payout.
Crypto exchanges are thus frequently home to considerable sums of virtual money. That’s especially the case for popular exchanges like FTX, which was at one time the third largest crypto exchange by volume. But while they might primarily act as facilitators of the trading and storing of cryptocurrency worth millions, exchanges also hold the keys to digital wallet access. If an exchange such as FTX fails, or is the victim of a hack, users who are the technical owners of crypto assets largely have no recourse to recover their investments.
Users own the tokens, but often sacrifice some degree of control to access these tokens, meaning cryptocurrency exchanges can be seen as holding underestimated amounts of power in crypto pipelines. FTX as such an exchange is no exception.
The recent troubles for FTX and its co-founder Bankman-Fried began within its own four walls, or rather those of Alameda Research, a financial trading firm also founded by FTX’s Bankman-Fried and run by his on-again off-again girlfriend Carolyn Ellison. In an article published to cryptocurrency news website CoinDesk (opens in new tab) on November 2, it was revealed that a majority of Alameda’s $14.6 billion in total assets came in the form of FTT cryptocurrency tokens.
With FTT tokens being the native token issued by FTX, this revelation raised eyebrows given the two companies’ shared founder and FTX’s responsibility for essentially overseeing and determining the value of the FTT token. A successful trading firm like Alameda Research being largely built on a foundation of a cryptocurrency token that it shares an owner with isn’t technically illegal, but raises prickly questions regardless.
If the value of the FTT token were to rise, so too would the value and overall assets of Alameda Research, given this token’s role as the large part of its asset foundation. Naturally, this led many to wonder about what someone with stakes in both might possibly be willing to do to ensure FTT’s growth in worth, ultimately adding value in return to both Alameda Research and FTX.
