The bankruptcy of Sam Bankman-Fried's cryptocurrency empire on Nov. 11 came as a shock to customers and investors of the various companies involved.
The immediate open question is whether they'll get their money back.
The FTX cryptocurrency exchange was one of the central platforms in the fledgling financial-services industry, which aims to disrupt traditional finance.
Millions of retail investors worldwide had opened accounts on FTX and bought and sold cryptocurrencies, leaving them in the exchange's custody.
They were confident because Bankman-Fried was then considered the institutional face of the crypto space and in February FTX was valued at $32 billion. One of its brand ambassadors was none other than the National Football League legend Tom Brady.
Everything was supposedly in place to assure them that the company was solid.
Alameda Research, FTX's sister company, was a hedge fund and trading platform, intended for institutional investors and professional traders.
But on Nov. 11, retail and institutional investors all found themselves in the same position: counting their losses after the restructuring of the Bankman-Fried empire.
FTX's top 50 creditors are claiming at least $3 billion from the company, according to court documents.
$175 Million Transfer Pending
Everyone has just received a little bit of good news.
LedgerX, one of the businesses in the Bankman-Fried empire, remains solvent and is set to transfer $175 million to FTX, reports Bloomberg News.
This transfer of funds will enable the formation of a pool of liquidity, which could be distributed to the creditors of FTX.
LedgerX's funds come from $250 million of cash that the firm had set aside to get the regulatory green light for crypto-derivatives trading, Bloomberg News says.
LedgerX didn't immediately respond to a request for comment.
This division, also known as FTX US Derivatives, is a cryptocurrency exchange operating in the U.S. It provides futures and options trading and is regulated by the Commodity Futures Trading Commission.
Upon FTX's Nov. 11 bankruptcy filing, LedgerX withdrew its application to the CFTC.
The news comes on the same day that Bankman-Fried is due to give a much-awaited live interview, as investigations by regulators and authorities are ongoing.
John Ray, the new CEO of FTX in charge of the liquidation of the Bankman-Fried crypto empire, indicated recently that he was exploring different scenarios to find cash, including a sale of assets. The company plans to sell or reorganize some of its businesses, Ray said on Nov. 19.
Three days later Ray said that FTX and a number of its affiliates had $1.24 billion in cash on the balance sheet when the firm filed for bankruptcy, according to court documents produced by Alvarez & Marsal North America. That firm is one of the advisers hired to help restructure Bankman-Fried's crypto empire.
Alameda Research, the hedge fund and trading platform that Bankman-Fried founded, had nearly $401 million on its balance sheet, according to a filing with the U.S. Bankruptcy Court for the District of Delaware.
One Million Investors
FTX could have as many as one million investors who are seeking to recoup their losses. The Bahamas-based brokerage filed for bankruptcy after facing massive liquidity issues when rival Binance backed out of a merger.
"In fact, there could be more than one million creditors in these Chapter 11 Cases," according to the Nov. 15 filing.
Here is the timeline of the downfall of FTX and Bankman-Fried.
As a crypto exchange, FTX executed orders for clients, taking their cash and buying cryptocurrencies on their behalf. FTX acted as a custodian, holding the clients’ crypto.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market-making. The cash FTX borrowed was used to bail out other crypto institutions in summer 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This was a significant exposure, due to the concentration risk and the volatility of FTT.
The insolvency of FTX stemmed from a liquidity shortfall when clients attempted to withdraw funds from the platform. The shortfall appears to have been prompted by FTX’s founder reportedly transferring $10 billion of customer funds from FTX to Alameda Research.