4 Reasons Behind the FTX Collapse

4 Reasons Behind the FTX Collapse

The Origin Story

2019 was a year that bore witness to the resurgence of cryptocurrencies. Bitcoin, founded in 2009 and known as the ‘granddaddy’ of crypto, was still pulling up top rank. 2019 also happened to be the year when then-27-year-old Sam Bankman-Fried, a former Wall Street trader, co-founded the Futures Exchange, (‘FTX’). The FTX group (consisting of multiple entities) quickly rose up the ranks to become one of the leading players in the new crypto economy landscape.  

Within two years, the company had signed deals with Mercedes’ Formula 1 Team, was backed by celebrities like Tom Brady, Gisele Bundchen, Larry David, Stephen Curry and Shaquille O’Neal, and had raised enormous fresh capital to the tune of $1.8 billion by the end of their Series C fundraise. However, the FTX empire came to an astounding collapse in November 2022, going from a valuation of $32 billion one week to filing for bankruptcy the next. 

What were the events that led to this domino effect, causing shockwaves through the industry and putting the legitimacy of cryptocurrencies in question? StructureFlow, the leading structuring solution for organizations, has mapped out the rise and fall of the FTX crypto empire using the power of visualization. Here we give a breakdown of the four main reasons behind the collapse.


Reason 1: Defective Governance

FTX was a centralized exchange which oversaw the buying and selling of digital assets. They were essentially a ‘custodian’ that held millions of customers’ assets and had more than 130 subsidiaries, yet had serious gaps in effective governance. The FTX group had virtually little to no corporate control and lacked a proper management structure or regulatory oversight across its entire three year run.  

On top of that, Bankman-Fried allegedly shifted hundreds of millions of dollars to quantitative trading firm Alameda Research, which he had founded in 2017 but had always claimed was an independent entity, (spoiler: it wasn’t). In November 2022, it was discovered that Alameda Research was in possession of a suspiciously large amount of FTT tokens (FTX’s native currency) – an ominous sign of just how much Alameda’s relationship with FTX was central to the company’s collapse.  

Bankman-Fried was the only board member when FTX collapsed (yet he had majority shareholdings across all four FTX entities), and despite high VC capital injection, no VCs ever took board seats. The absence of any independent governance too was noticeable, with all decision making and knowledge of the company’s affairs restricted to Bankman-Fried and a handful of inexperienced peers he lived with.

Reason 2: Financial Chaos

Despite being valued at $32 billion before the collapse, FTX was not able to produce credible financial statements due to their distinct lack of cash management. FTX.US and FTX.COM did not engage with an auditor for their 2022 fiscal year, and neither of the other two entities, Alameda Research and their venture unit, had ever engaged with an external auditor. Indeed, there were many red flags that commentators are saying shouldn’t have been missed, including the actions of Prager Matis and Armanino (the auditors now facing lawsuits) who ‘knowingly, or recklessly, or with willful blindness’ helped facilitate the enterprise.  

The hiring of not one but two external auditing firms is also now considered another step taken by Bankman-Fried as a possible attempt to keep any one firm from seeing the whole picture. Overall, FTX by end of 2022 had no accurate lists of bank accounts to present, account signatories or liquidity forecasting; QuickBooks was allegedly used for auditing, along with the use of disorganized, poorly labeled Excel spreadsheets.  

Reason 3: Circular Cashflows

The FTX group’s financial model was designed to facilitate a circular ‘money-go-round’ cashflow system, effectively enabling FTX.com and Alameda to allegedly defraud customer funds and circulate billions of dollars across its entities, the crypto industry and beyond. In December 2022, the US Attorney Office charged Bankman-Fried with an eight-count indictment (including wire fraud, conspiracy to commit money laundering and campaign finance violations), for which he will be facing trial in October 2023.  

The controversy began when CoinDesk reviewed how a sizable portion of Alameda’s balance sheet consisted of FTT Tokens. This then followed the discovery of FTX’s mishandling of customer funds to Alameda Research, who then lent vast amounts to various causes, leveraged against in-house collateral (FTT Tokens). The final straw came when the CEO of Binance, FTX’s direct competitor, tweeted that he would be liquidating all its FTT holdings. This tweet caused the price of FTT Tokens to drop by almost 90% in value, leading to a massive surge of withdrawals as customers started to panic about the safety of crypto.  

While FTX had been able to facilitate prior day-to-day customer withdrawals with its circular cashflow system, it was not built to withstand such a sudden and large surge of customer withdrawals. Despite Bankman-Fried scrambling for days to put together an emergency funding package and bailout options, the empire was crumbling and FTX filed for bankruptcy on November 11th. 


Reason 4: Legitimacy Facade

Up until its collapse, FTX was the world’s second largest crypto-exchange and widely regarded as credible and reliable in the market, despite the defects in its business model. This was possible because FTX and Bankman-Fried conducted an intensive public relations campaign to brand himself and the company as the face of ‘honest crypto’.

He invested significant resources to promote the company as a trustworthy steward in the industry, leveraging A-list celeb endorsements, blue-chip VC backing, positive relationships with the US Congress and Bankman-Fried’s ‘effective altruism’ campaign. This veil of legitimacy was the catalyst for the former CEO’s ‘crypto white knight’ persona, enough to assure customers that FTX was an exciting and lucrative investment to their portfolio. 

The FULL Breakdown of the FTX Collapse

This has been a brief glimpse of the full FTX journey that we’ve mapped out entirely using visual modeling. At StructureFlow, we understand that companies today deal with large entities and complex data that can slow down effective decision making. 

For a deeper dive into the collapse of FTX join our expert panel who will discuss this during our upcoming FREE online webinar, Breaking down the FTX Collapse through Visual Modeling, on Tuesday 21st February, 16:00 GMT.

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FTX Collapse Webinar visualising using StructureFlow

Register Now for our Exclusive FTX Webinar

In this exclusive webinar, Owen Oliver and an expert panel will discuss the rise and fall of FTX using the power of visualization and modeling. Register below to join our live webinar, Breaking down the FTX Collapse through Visual Modeling at 16:00 GMT on Tuesday 21st February.

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