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FTX cryptocurrency exchange files for bankruptcy: what is FTX and what happened?

A financial black hole after a buyout collapse leaves customers in the lurch amid accusations of misuse of funds. What happens next?

Representations of cryptocurrencies are seen in front of displayed FTX logo and decreasing stock graph in this illustration taken November 10, 2022. REUTERS/Dado Ruvic/Illustration

Struggling cryptocurrency exchange FTX has filed for chapter 11 bankruptcy and its CEO has resigned after a collapse in the value of its linked crypto coin left a $7 billion shortfall in the companies finances.

CEO and founder Sam Bankman-Fried has lost his entire $16 billion fortune overnight according to Bloomberg’s analysis, one of the biggest destructions of wealth of all time. While this was all wealth speculation considering this was all held in seemingly his own cryptocurrency it marks a dramatic fall from grace for a young crypto investor who just this summer was rubbing shoulders with Bill Clinton and Tony Blair, former US president and former UK prime minister respectively.

A chapter 11 bankruptcy filing, filed in Delaware, is basically a restructuring led by the court. The court is then tasked with finding a way of paying creditors. As the company is thought to be worthless it could result in the liquidation of FTX while the filing also prevents litigation by creditors toward Bankman-Fried.

On the news the value of Bitcoin sharply dropped to less than $14,300, its lowest value since December 2020.

How did we get here?

FTX was suffering a serious liquidity crisis after the collapse in the value of its linked cryptocoin, named FTT. Bankman-Fried was reported to be using the coin as collateral to take out loans for FTX as well as its sister hedge fund Alameda. Therefore the value of both of these companies were both inextricably linked to the value of FTT.

Last Sunday, FTX competitor Binance announced the sale of all of its FTT holdings, worth $500 million. This killed the value of FTT as investors rushed to sell their investments, further damaging the value of both FTX and Alameda.

Stricken with panic Bankman-Fried reached out to Binance’s CEO Changpeng Zhao hoping to sell the company to him. A proposed deal on Tuesday between the two was supposed to resolve the crisis, but Binance abandoned the deal a day later.

Binance said in a statement posted on Twitter that the issues facing FTX were “beyond our control or ability to help”.

Rumours are swirling of misuse of investor funds by FTX. The Wall Street Journal reported that FTX had loaned $10 billion of customer funds to Alameda to invest, leaving both companies at risk of serious danger if the investments were poor or its value collapsed, which it did.