The fall of FTX could have been predicted if researchers conducted proper blockchain analysis, but that didn’t happen until it was too late.
On November 2, 2022, CoinDesk released a report based on a leaked balance sheet for FTX CEO Sam Bankman-Fried’s Alameda Research. The report revealed that most of the company’s assets were based on FTT, FTX’s own centrally controlled token and not backed by real currency. In the weeks that followed, the Security and Exchange Commission charged Bankman-Fried with fraud.
The company’s ties to Alameda Research, a cryptocurrency trading firm, has created a twisted story of fraud, bad debts and the volatility overall of the crypto market. It has raised questions about affiliate relationships between companies and the vulnerability of cryptocurrency. Researchers following crypto projects may wonder what this means for other cryptocurrencies. Let’s examine some of the key concepts and events that led to the downfall of FTX.
What is FTX?
In 2018, MIT graduate and former Jane Street Capital international ETF trader Sam Bankman-Fried founded Futures Exchange (FTX), a centralized cryptocurrency exchange. Within three years, it became the second largest crypto exchange behind only Binance, worth nearly $30 billion. During their height, FTX also provided spot markets (trades for immediate delivery, rather than later delivery as in a futures market) for more than 300 cryptocurrency trading pairs, including for its native token.
The FTX Token, or FTT, first came on the scene in 2019, and by 2021, the digital currency was valued at almost $80 per token. By November 2022, when the exchange and the companies in its orbit began a steep fall from grace, there were 250 million FTX Tokens in circulation, even though they weren’t backed by any real funds or stable currency. Ultimately, it was the FTX Token that was the catalyst for the company’s unraveling, with major investors offloading hundreds of millions of dollars’ worth of FTT, erasing the value of the token in a matter of hours.
For a more exhaustive analysis of what happened and how the fraud was perpetrated, Nansen has an in-depth analysis of the collapse available.
A notoriously volatile market
During its prime, FTX spared no expense to attract investors and promote its exchange and became a leading crypto player on the world stage. The problem is that the cryptocurrency market as a whole has faced many challenges over the past few months – propelled by the collapse of TerraUSD (stablecoin), and the fall of LUNA, its sister token. Stablecoins facilitate most crypto trading volume and are the foundation of Decentralized finance (DeFi) – the application that’s designed to cut intermediaries out of financial transactions – and their troubles have contributed to the volatility of the entire crypto market. When concerned investors began taking their money out of FTX in early November of 2022, it became apparent that FTX lacked the liquidity needed to back their transactions.
After FTX has filed for Chapter 11 bankruptcy protection, its wallets were emptied in an apparent hack. John J. Ray III who replaced Bankman-Fried as CEO (and famously oversaw the liquidation of Enron) had this to say in the bankruptcy filing: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
Reports agree that the muddled relationship between Alameda and FTX was a significant factor in the collapse, and that the fall of FTX could have been predicted if the proper blockchain analysis was conducted by researchers.
Crypto is here to stay
In addition to the instability brought by the collapse of FTX, experts cite global economic factors, such as rising global inflation, stock market volatility and recession fears as the main reasons for the ongoing downward spiral of Bitcoin. And while it’s impossible to predict what will happen to cryptocurrency in the future, the interest among investors remains high, despite turbulent price swings and an assortment of proposed legislative actions aimed at taming the decentralized and unregulated crypto market. Mainstream financial companies like PayPal are now allowing investors to buy Bitcoin, Ethereum and other currencies on their platforms, making it easier for investors to try out crypto exchanges.
One place where the use of cryptocurrency has not shown any signs of slowing down is the darknet. Monero remains the cryptocurrency of choice for buyers and sellers on darknet marketplaces – partially because of its unique privacy properties that go beyond those of competitor products, making transactions virtually untraceable. I suspect that darknet users may have long been suspicious that something devious was going on with FTX, and preferred to stay away from it. Monero is now valued higher than before the collapse of FTX, which is an important sign for online researchers who hunt for clues on the dark web that cryptocurrency is not going anywhere.
What it means
When I started looking at the fall of FTX, it seemed like this was a large fraud committed by FTX and its former CEO, Sam Bankman-Fried. The current CEO, John J. Ray III, who is well known for helping reorganize Enron after their issues, has indicated that he has, “never seen such a complete failure of corporate controls and such complete absence of trustworthy financial information as occurred here.” Right now there are several lawsuits pending against FTX and Alameda Research from people they owe money to, also would like them to reveal some questionable activity. Just recently, former FTX CEO Sam Bankman-Fried has been arrested in the Bahamas on conspiracy to commit wire fraud on customers and lenders, conspiracy to defraud the United States and violate the campaign finance laws and other charges.
When it comes to conducting analysis on transactions that occurred in FTX, using either paid tools like Chainalysis Reactor or a non-paid tool like Blockchain Explorer or Blockchair will offer the best results when it comes to finding out information. That being said, there are several issues that arise when looking at FTX as there are reports of a cyber attack that caused the transfer of funds out of FTX of roughly $4.5 million in Bitcoin and some $477 million in unauthorized transactions. There are also reports that there is more than $1 billion of client funds missing from FTX as well. Tracking transactions may only be possible through a paid service like Reactor as they are able to link the transactions to other wallets that may have interacted with the wallets you were researching.
Overall it appears that there will be more information coming out over the next weeks and months that will shed light on what happened. In the end, it seems the fall of FTX could have been predicted if the proper blockchain analysis was conducted by researchers but this did not occur until it was too late. But we don’t know how widely the repercussions will hit. The crash has led to renewed calls for regulation of the cryptocurrency market, something privacy advocates vehemently oppose. The creation of paper trails could simultaneously help researchers but also may drive more targets out of the market if the veil of anonymity is lost. For now, we can only speculate how far the ripples of FTX’s fraud will carry.
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Tags Anonymous research Cryptocurrency Dark web research OSINT research
