FTX, a leading crypto exchange focusing on derivatives and leveraged products, was founded in 2018 by Sam Bankman-Fried, an MIT graduate who worked as a trader at Jane Street Capital, a global trading firm.
FTX offers a range of trading products, including derivatives, options, volatility products, and leveraged tokens. The exchange also provides spot trading services for more than 300 crypto pairs, such as BTC/USDT, ETH/USDT, XRP/USDT, and its native token, FTT/USDT.
FTX is based in the Bahamas, with an affiliate in the United States FTX. Both entities have the same management team but separate capital structures. For residents of the United States, they can only use FTX US to trade.
What is FTX?
FTX, a centralized crypto exchange, was founded in 2019 by Sam Bankman-Fried and Gary Wang. Bankman-Fried, an MIT graduate and former Wall Street trader, partnered with Wang, who had previous experience at Google.
As of July 2021, FTX is ranked as the third-largest crypto exchange in the world. The products they offer include derivatives, leveraged tokens, and volatility products. Officially, FTX was incorporated as a company in Antigua and Barbuda, an island nation in the Caribbean Sea.
In September 2021, they moved their headquarters from Hong Kong to the Bahamas. The Securities Commission of the Bahamas regulates their subsidiary, FTX Digital Markets Ltd.. Despite this, FTX does not provide services to residents of the United States.
Crypto traders from the United States can utilize the services of FTX US, a financial services business registered with the Financial Crime Enforcement Network (FinCEN). In October 2021, FTX US completed the acquisition process of LedgerX and changed its name to FTX US Derivatives.
FTX received an investment of $900 million in July 2021, which raised its valuation as a company to $18 million. In September 2021, FTX signed a sponsorship contract with Mercedes’ Formula 1 team.
Then, in October 2021, FTX managed to get another injection of funds. Temasek and Tiger Global were the two main investors involved in this investment, which caused FTX’s valuation to increase to $25 million.
After receiving an injection of $400 million, FTX US was reported to have a valuation of $8 million as of January 27, 2022. The investment came from a number of FTX’s early investors, including SoftBank Group and Temasek.
Meanwhile, a report from Reuters stated that as of January 31, FTX’s valuation had reached $32 million after securing an additional $400 million in funding. On June 4, 2022, FTX announced signing a sponsorship contract with the Miami Heat basketball team.
It was reported that to place the FTX name on the basketball team’s headquarters, the crypto exchange paid $135,000,000. Not only that, in early July 2022, FTX offered a $400,000,0000 recurring credit facility for BlockFi, which was facing challenges at the time.
In addition to the credit offer, FTX also signed an option agreement to purchase BlockFi. In the same month, FTX also provided partial assistance to Voyager Digital, a crypto lending service.
However, Voyager stated that the offer from FTX was considered lower than it should have been. Then, in August 2022, bank regulators in the United States instructed FTX to stop claiming that the government protected funds in the company.
This was because the claims were deemed false and potentially misleading to FTX customers. Furthermore, compared to other crypto exchanges, one of FTX’s advantages is its easy-to-use mobile and desktop applications.
In addition, they also offer a wide range of products. According to Investopedia’s report, this attracts crypto investors, ranging from beginners to professionals, to use FTX’s services.
FTX Operations and Management
Quoting investopedia.com, FTX was incorporated in Antigua and Barbuda and is headquartered in the Bahamas after moving from Hong Kong in September 2021. The FTX Digital Markets Ltd. unit is regulated by the Securities Commission of the Bahamas (SCB) and does not offer crypto services to residents of the United States.
US-based crypto traders can only access partner entity FTX US-a registered financial services business (MSB) with FinCEN. In October 2021, FTX US completed the acquisition of crypto derivatives exchange platform LedgerX, which was renamed FTX US Derivatives.
FTX US Derivatives is licensed as a Derivatives Clearing Organization, Swap Execution Facility, and Designated Contract Market by the United States Commodity Futures Trading Commission (CFTC).
Despite having independent capital structures, FTX and FTX US have similar overlapping management, capital sources, and marketing.
Both companies have the same investors, celebrity endorsements, and well-known brand sponsors, and list Sam Bankman-Fried as chief executive officer (CEO) and Gary Wang as chief technology officer (CTO) and co-founder.
Every investor in FTX’s Series C venture capital funding round simultaneously supporting FTX US’s Series A funding round. Participating investors included Temasek, Paradigm, Ontario Teachers’ Pension Fund Board, NEA, IVP, SoftBank Vision Fund 2, Lightspeed Venture Partners, Steadview Capital, Tiger Global, and Insight Partners.
Promotional partnerships were signed with venture capitalist and “Shark Tank” reality TV celebrity Kevin O’Leary and NBA star Stephen Curry, who received equity stakes in FTX and FTX US.
Naming rights were purchased for the Miami Heat basketball court, becoming FTX Arena, and for the University of California, Berkeley football stadium, becoming FTX Field.
FTX Stock Price
Quoting the investopedia.com page, although FTX equity is not available for public trading, most retail investors can bet on the exchange by buying FTX tokens (FTT), which are issued by the exchange itself.
These tokens can be used to pay transaction fees and as margin collateral, and are traded on crypto markets like stocks.
As of April 12, 2024, the price of the FTT token was around $1.60, down 98% from its highest level in September 2021. According to crypto site CoinMarketCap, the token “no longer has any use, and may be liquidated by the estate to pay creditors”.
FTX Security and Compliance
Quoting the investopedia.com page, to open an FTX account and make withdrawals, the company requires customers to secure their accounts with two-factor authentication (2FA) and a combination of passwords with complex character requirements.
Related to that, withdrawals will be locked if the password or 2FA information of the account is changed. Registered users can assign custom logins to sub-accounts and set security permissions that determine which internet protocol (IP) or crypto wallet addresses can perform transactions with the account.
Sub-accounts grant multiple users access to the same parent account with customizable permission levels and withdrawal capabilities.
“Read only” privileges allow users to view historical activity but cannot execute trades.
FTX uses real-time anti-money laundering (AML) compliance services to monitor user activity and notify account owners for further verification when large deposits and unusual transactions are detected.
Customers must verify identity through a Know Your Customer (KYC) process to gain full trading, deposit and withdrawal functionality.
For hot wallets and cold wallets that support all exchange assets, FTX claims to have multiple layers of security controls and that losses due to system-wide disruptions and hacks can be compensated with the FTX Reserve Liquidity Fund which is rumored to be worth around $200,000,000 as of May 2021.
Products and Trading Partners
FTX offers a wide range of order types and easy-to-use desktop and mobile trading applications for crypto investors of different skill levels through key products including spot markets, options and futures contracts, leveraged tokens and MOVE.
Retail and institutional investors can utilize basic market orders and complex trailing stop orders for hundreds of crypto trading pairs such as BTC/USDT, ETH/USDT, XRP/USDT, and FTX’s native exchange token, FTT/USDT.
Futures
Traders can place long and short bets by capitalizing on small price movements on leading cryptocurrencies using over 100 quarterly and perpetual futures pairs with up to 20x margin. Stablecoins, such as USD Coin (USDC) and True USD (TUSD), are used as collateral to open and maintain positions.
Leveraged Tokens
FTX offers ERC20-based tokens that give traders up to 3x leveraged exposure to the underlying trading pairs.
For example, if a trader opens a BULL/USD bitcoin long token – 3x and bitcoin rises 10% from the time of purchase then that leveraged token will earn 30%. FTX leveraged tokens do not require margin requirements.
Options
Traders can speculate on future price direction and hedge their open positions with a variety of call and put options that give the holder the right, but not the obligation, to buy or sell at a future strike price.
MOVE
These contracts allow traders to bet on how far the price of a crypto will move over a certain period of time, regardless of direction, essentially making them a bet on volatility.
As long as the price of the underlying crypto moves more than a certain dollar amount-either up or down-the contract will generate a profit.
Spot Market
FTX offers over 100 different spot trading pairs, providing exposure to leading cryptos such as Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Chainlink (LINK), and Ripple’s XRP.
FTX US offers dozens of crypto spot trading pairs with fiat currencies, along with a marketplace for non-fungible tokens (NFTs).
While FTX US only supports the United States dollar, it serves international customers and deposits and withdrawals via wire transfer in nine fiat currencies: United States dollar (USD), euro (EUR), pound sterling (GBP), Australian dollar (AUD), Canadian dollar (CAD), Swiss franc (CHF), Brazilian real (BRL), Ghanaian cedi (GHS), and Argentine peso (ARS).
FTX also has restricted usage for the Turkish lira (TRY) and Japanese yen (JPY) and promises functionality for the Hong Kong dollar (HKD), Singapore dollar (SPD), and South African rand (ZAR).
Why Did FTX Go Out of Business?
Quoting investopedia.com, FTX filed for Chapter 11 bankruptcy protection and announced the resignation of CEO Sam Bankman-Fried on November 11, 2022.
In December 2022, Bankman-Fried was extradited from the Bahamas to the United States, and along with other FTX executives was arrested and charged with conduct that prosecutors and regulators said constituted fraud and money laundering and increased the likelihood of FTX becoming illiquid.
Criminal charges from the United States Department of Justice (DOJ) and civil suits from the United States Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) claim that FTX leadership siphoned off customer deposits and deceived customers, investors, and lenders about the company’s accounting with false statements that concealed losses from the theft.
The stolen funds were used to purchase luxury real estate properties and yachts and to fund charities, political campaigns, and business ventures.
Bankman-Fried asserted his innocence in interviews and pleaded not guilty to the charges on January 3, 2023, but was later sentenced by a jury on November 2 after the conclusion of a month-long trial that began on October 2.
His associates had pleaded guilty and testified at the trial that he played an active role in the alleged crimes.
FTX’s new court-appointed CEO, John J. Ray III, an American executive with experience restructuring scandal-plagued companies such as bankrupt energy trader Enron, described FTX’s collapse as a “total failure of corporate control” and “old-style embezzlement of funds”.
Damian Williams, United States Attorney for the Southern District of New York, the federal court prosecuting the exchange’s former management, described FTX as “one of the biggest financial crimes in history”.
A federal class-action lawsuit filed by customers in November 2022 accused FTX of being a fraudulent crypto scheme and Bankman-Fried and FTX’s celebrity promoters, including Stephen Curry, Shaquille O’Neal, Shohei Ohtani, Naomi Osaka, Larry David, Tom Brady, and Kevin O’Leary, of embezzling less experienced US investors.
Meanwhile, a Bitcoin.com news report mentioned that Taylor Swift rejected a promotional partnership with FTX after examining its regulatory risks.
FTX Bankruptcy Facts
According to bankruptcy documents, FTX has at least $8,000,000,000 that it cannot pay to as many as 1,000,000 creditors.
To fulfill these obligations, the bankruptcy estate is seeking to legally reposition and liquidate purchases, investments, gifts, and donations believed to have been made with company funds.
Furthermore, investors may not get back all the money they lost as some transactions may be difficult to trace or have declined in value.
Does it Impact Crypto Investors in Indonesia?
Quoting the firstindonesiamagz.id page, the impact of the bankruptcy of FTX, a leading crypto exchange, has reached Indonesia. In response, the Commodity Futures Trading Supervisory Agency (Bappebti) decided to stop trading on FTX starting November 14, 2022.
According to Bappebti, the transaction value of FTX tokens reached Rp106,500,000,000 with a transaction volume of 193,435 in the period January to October 2022.
“Based on the results of analysis and consideration as well as for the security and protection of the interests of crypto asset customers in Indonesia, we recommend that crypto asset physical trading companies not facilitate FTX Token trading. It is expected that the crypto asset physical trader company will also make settlements in accordance with statutory regulations,” said the Head of Bappebti at that time, Didid Noordiatmoko, in an official statement quoted via cnbcindonesia.com.
FTX’s market share in Indonesia was recorded at only 0.038% of the total value of crypto transactions in the period January to October 2022, which reached Rp 279,800,000,000,000.
According to Didid, Bappebti is keeping an eye on traders who facilitate FTX token trading. Therefore, prospective traders who are interested in trading FTX should pay attention, observe, and analyze the development of the token to protect the interests of customers.
Conclusion
In conclusion, FTX Exchange has managed to become one of the leading crypto exchanges in the world. It offered innovative trading products such as futures, options, leveraged tokens, and MOVE contracts.
They later expanded their reach by establishing FTX US to serve the United States market. FTX’s founder and CEO, Sam Bankman-Fried, managed to build a strong brand image and established various promotional partnerships with famous celebrities and athletes, expanding the exchange’s influence and appeal.
However, FTX then faced a number of challenges, including increasingly stringent regulatory pressures in various countries, and financial problems that eventually led to the company’s bankruptcy.
The FTX bankruptcy case itself carries important lessons for the asset exchange industry at large. Ultimately, the FTX bankruptcy case shows that while the crypto exchange industry is growing rapidly, it remains vulnerable to complex financial and regulatory risks.
In that regard, industry players, be they exchanges, investors, or regulators, need to learn from the FTX case that good financial risk management and regulatory compliance are critical to maintaining business continuity in a dynamic and high-risk environment like the crypto market.
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