What really happened

FTX rose from a Hong Kong garage to the world’s third-largest crypto exchange in just four years. Founder Sam Bankman-Fried (SBF) — son of two Stanford law professors, MIT graduate — became the face of the crypto industry. At Reuters conferences, in Vogue interviews and Senate hearings he preached “effective altruism”: earn money in order to deploy it for global problems. 2021 valuation: $32 billion. Board and advisors: Tom Brady, Larry David as endorsers, ex-SEC chairs as advisors.

In the background there existed a second company: Alameda Research, SBF’s crypto hedge fund, nominally run by his then-girlfriend Caroline Ellison. FTX and Alameda were legally separate but operationally deeply intertwined. Customer deposits on FTX were funneled to Alameda via a secret backdoor function called “allow_negative”, which used the funds for risky trades and investments. Overall, Alameda used about $8 billion of customer funds — without the knowledge or consent of FTX users.

On November 2, 2022 CoinDesk published a report: Alameda’s balance sheet was 40% FTX’s own token, FTT. That was economically comparable to a bank using its own equity as collateral for loans — if confidence cracks, both collapse together. Binance CEO Changpeng Zhao announced the sale of his FTT position on November 6. Within 72 hours, FTX customers withdrew $6 billion. On November 8 FTX halted withdrawals. On November 11 the group filed for Chapter 11. SBF was arrested in the Bahamas in December and sentenced to 25 years in prison in March 2024.

The warning signs everyone ignored

SBF’s public persona was a warning in itself: unwashed hair, sleeping on beanbags at the office, FTX headquartered in a Bahamas beach compound rather than a regulated financial jurisdiction. Crypto veterans like Coinbase CEO Brian Armstrong voiced skepticism about the scale in 2022. Sequoia Capital — one of FTX’s largest investors — published a hagiographic profile of SBF beginning “SBF is an FTX-er, but he’s also a saver-of-the-world type”; Sequoia later wrote off its $214M investment in full.

Structural warnings: FTX had no CFO and no proper audit processes. John Ray III, brought in as restructurer after the insolvency (previously he wound down Enron), described the situation as “the worst corporate-governance failure I’ve seen in 40 years”. There was no accounting system, no internal controls, no separation of customer and company funds. Books were kept in Quickbooks — not in any enterprise system.

What investors can learn today

First: crypto exchanges are not banks. They are typically not covered by deposit insurance. “Not your keys, not your coins” applies — anyone holding crypto on a centralized exchange takes on its insolvency risk. Second: using your own token as collateral is a circular risk. When solvency depends on the price of your own token, insolvency becomes reflexive. Third: effective altruism, big donors and athlete endorsements are no substitute for audits. Tom Brady and Larry David had no idea what was happening inside FTX. Glamour is not due diligence.