FTX, FTX.US, bankruptcy, United States, Binance, Sam Bankman-Fried, Crypto Crime Cartel, Alameda Research, Bahamas, Tether

FTX Bankruptcy: Hacked, regulated or rug-pulled as traders despair

Traders already on edge after FTX’s dramatic implosion this week were rocked again today by signs the exchange had been hacked. Observers noticed on-chain records showing “hundreds of millions of dollars” worth of digital assets began leaving the company’s wallets late on Friday night.

FTX filed for Chapter 11 bankruptcy protection in the United States on Friday after experiencing a severe liquidity crisis. Despite assurances from CEO Sam Bankman-Fried (aka “SBF”) that funds in the U.S.-licensed subsidiary FTX.US were safe, that entity was also included in the filing. Users have been unable to withdraw funds amid signs they may never see their money again.

FTX’s sudden downfall, and the surrounding accusations of collusion and dishonesty, have obliterated trust in some of the digital asset trading industry’s biggest names. It couldn’t have come at a worse time, either, with prices taking record tumbles for most of the past year.

Hey, what’s happening to our coins?

Users posting on Twitter and in the official FTX Telegram chat group said the company’s home page, FTX.com, was down. They warned others not to try to access the site or download the app, fearing it could download malware.

Some replies speculated on whether regulators in the Bahamas (where FTX headquarters are located) were moving to secure funds from the company’s wallets. Others were more skeptical, saying the timing and speed of the withdrawals were too unusual to be the government—either a hacker was draining FTX’s wallets or insiders at the company could be capitalizing on the chaos to steal funds, they claimed.

Mainstream media reports noted earlier that over US$1 billion and possibly as much as $2 billion in deposited user funds was “unaccounted for.” This followed revelations the firm had moved $10 billion from the exchange to its partner, trading firm Alameda Research, which precipitated FTX’s bankruptcy declaration.

FTX’s swift fall from ‘grace’

Until very recently, FTX and Bankman-Fried had been the darlings of the digital asset world. FTX had grown to be (along with Binance) one of the world’s most popular trading platforms. Their bailouts and acquisitions of smaller, often failing digital asset enterprises were even seen as bringing some respectability to the market after years of scams, losses, hacks and other shenanigans. Bankman-Fried appeared to be government and Big Finance friendly, with appearances before U.S. Congressional committees and favorable coverage in major media. In March 2021, FTX did a US$135 million deal with Miami-Dade county for naming rights to the Miami Heat’s home stadium.

CoinGeek has warned for most of the past year that Bankman-Fried may not the be breath of fresh air the “crypto community” wanted him to be. As far back as January 2021 SBF was defending Tether’s (USDT) viability as a redeemable USD surrogate, despite the New York Attorney General’s investigation strongly suggesting otherwise. Even earlier than that, there were allegations of links between FTX and Tether’s creators and large transfers of USDT to FTX’s wallets that led almost immediately to large jumps in “Top Ten” digital asset prices like BTC and ETH.

Alameda Research was a direct investor in the Solana project and Bankman-Fried often touted Solana’s “scalability” even as its network stuttered and rebooted. Tether released more USDT tokens as contracts on the Solana blockchain.

Binance and the big ‘crypto’ club

It was public revelations from Binance and that company’s founder Changpeng “CZ” Zhao about the true state of Alameda’s finances that kicked off FTX’s tsunami of wreckage. Though the information apparently resulted from due diligence Binance undertook to provide liquidity to (and now, it seems, bail out) FTX, the two companies also have links going back years. As far back as December 2019, the two companies announced a deal that saw Binance take a long-term position holding FTX tokens (FTT) while FTX would help Binance build out its liquidity and institutional product offerings. Zhao at the time said:

“The FTX team has built an innovative crypto trading platform with stunning growth. With their backgrounds as professional traders, we see quite a bit ourselves in the FTX team and believe in their potential in becoming a major player in the crypto derivatives markets.”

As the late George Carlin once said, “it’s a big club and you ain’t in it.” Digital assets—more specifically, digital asset trading—has had many big winners and losers over the years, but it always seems to be the average punter who loses the hardest. Hapless traders have been speculating on and losing their life savings to “crypto” for a decade now, with losses only growing as more and more useless assets have entered the market. These losses seem to come just as often from business failures, backroom deals gone wrong, thefts and scams, as they do from price movements. This is leading to a state of perpetual despair that is driving serious investors away from the industry, and even demoralizing the market’s infamous “degenerate gamblers.”

Ultimately this is all the result of the crypto industry’s laser focus on greed and quick gains rather than technological fundamentals. Promises to change the world for the better and increase transparency consistently take a background seat to parties and truckloads of dollars, leaving those who should have benefited from blockchain technology out in the cold.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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