Inside the FTX Crypto Scandal

ftx scandal

On November 7th, Sam Bankman-Fried had an estimated $16 billion fortune, largely invested in cryptocurrencies. By the end of the week, that fortune was gone. According to Bloomberg, it was one of “history’s greatest-ever destructions of wealth.” It occurred alongside the collapse of his crypto exchange, FTX, an event that has shaken the entire cryptocurrency industry.

Comparisons have been made between what is currently developing in crypto with the Enron scandal of 2001. Although we do not yet know all the details of the FTX incident, there are several similarities between the two incidents. Read on to learn more.

A Short Summary of the FTX Collapse

FTX was an established crypto exchange founded by Sam Bankman-Fried in May 2019. In a short period of time, FTX and its founder were able to convince several venture capitalists and investors of the future possibilities of the platform. Billions of dollars began flowing in. Investors included Softbank, Sequoia Capital, and others.

Meanwhile, Sam was being referred to as the Warren Buffett of the crypto world and was able to build a well-known and well-liked persona as a young genius. He was invited to gatherings with some of the most powerful people and most famous celebrities in the world. FTX did an advertising campaign with several celebrities and athletes, including Tom Brady, Stephen Curry, Shaquille O’Neil, and Kevin O’Leary. Presented as a safe way for new investors to tip-toe their way into the crypto world, FTX rapidly expanded, handling millions of dollars in deposits.

Then, the trouble began. Bloomberg and CoinDesk (another crypto exchange) began looking closer at the relationship between FTX and Alameda Research, Sam Bankman-Fried’s private trading firm. Their conclusion was not good. Based on a leaked financial document, CoinDesk reported that Alameda had large holdings of the FTT Token (native cryptocurrency for FTX). According to them, this evidence showed that the “ties between FTX and Alameda are unusually close.” This story set off a number of rumors and suspicions that the owner of FTX might be illegally trading using depositor’s funds.

Days later, Binance (FTX’s most significant rival) announced that they were liquidating $580 million worth of FTT. This triggered a massive storm of crypto sales of FTT. FTX ran out of capital and had to freeze withdrawals. They then declared chapter 11 bankruptcy. The value of cryptocurrencies across the industry plummeted. Sam Bankman-Fried’s entire empire was left in shambles.

The Enron Connection

Like FTX, Enron was an enormously successful company that was on the rise. Also similar to Enron, it appears that the leadership of FTX attempted to hide illicit transactions by working with a separate-but-related company, Alameda Research. Thirdly, the Enron collapse was massive, the largest in history at that time. The FTX collapse is also formidable in size and is the largest in the history of crypto.

Finally, in a twist of fate, the new CEO of FTX, who has been brought in to manage the restructuring of the company, is John Ray III. John Ray III is also the lawyer who was brought in to oversee the liquidation of Enron as CEO.

The chief lesson learned from the Enron scandal is that the United States government takes financial fraud very seriously. In response to the Enron collapse, the government based the Sarbanes-Oxley Act, which placed several additional restrictions and regulations on accounting and record-keeping for corporations. It is highly possible that new regulations on cryptocurrencies and exchanges could be forthcoming as the FTX collapse continues to unfold.