The recent collapse of the cryptocurrency exchange FTX and the arrest of founder and ex-CEO Sam Bankman-Fried has raised many questions regarding the future of blockchain and Non-Fungible Tokens (NFTs). As a market many people were already skeptical about, this scandal certainly does not inspire faith in the future of NFTs. Despite FTX's failure, the collapse of one exchange does not necessarily mean that blockchain and NFT technology is doomed as a whole.
What is Alameda Research?
Alameda Research was a quantitative cryptocurrency trading firm, co-founded in September 2017 by Sam Bankman-Fried and colleague Tara Mac Aulay. On Twitter, Mac Auley confirmed she left the company in April of 2018 due to "concerns over risk management and business ethics."
Alameda was established in 2002. Two years later, Bankman-Fried created FTX as a cryptocurrency exchange that was completely independent from Alameda. Although they were established as two separate entities, Alameda played a huge role in the growth of FTX, acting as FTX's main market maker.
Bankman-Fried, Alameda's CEO in 2019, resigned to support his claim that FTX was "wholly different" from Alameda. As it turns out, the two entities were more closely tied than Bankman-Fried claimed them to be. Not only did executives at Alameda and FTX often work out of the same Bahamian penthouse, but FTX CEO Bankman-Fried and Alameda CEO Caroline Ellison were rumored to have romantic ties. The relationship between the companies doesn't end there.
What is FTX?
FTX Trading Ltd., commonly known as FTX or FTX Exchange, was a cryptocurrency exchange founded in April 2019 by Sam Bankman-Fried and Gary Wang. Prior to its bankruptcy in November of 2022, the exchange had over 1 million users and was the third-largest crypto exchange by volume. FTX stands for Futures Exchange.
What is FTT?
FTT is the native token of FTX. FTT tokens were created to provide a way for traders to save on trading fees and reward loyal users. FTT holders received a better referral rate, daily ERC20/ETH withdrawals of up to 1000 and a greater probability of airdrops. Additionally, the exchange token has a centralized collateral pool meaning the collateral pool will increase in value when markets are volatile. This reduces transaction fees and allows users to trade easily.
The benefits provided by FTT tokens seem appealing at first glance; however, had the token been more difficult or expensive to use as collateral, the risk to customer funds may have been reduced.
Who is the CEO of FTX?
Sam Bankman-Fried was the CEO of FTX before the company collapsed. Prior to starting his companies, Bankman-Fried graduated from the Massachusetts Institute of Technology (MIT) and worked at Jane Street Capital, a proprietary trading firm. Right before he founded Alameda, he worked at the Centre for Effective Altruism as the Director of Development.
A Brief Timeline of FTX
Mai 2019
FTX is founded by Sam Bankman-Fried and his roommate, Gary Wang.
November 2019,
Changpeng Zhao from Binance buys a 20% stake at FTX for around $100 million.
August 2020
FTX acquires cryptocurrency portfolio tracking app, Blockfolio, for $150 million.
July 2021
FTX raises $900 Million from more than 60 investors at an $18 Billion valuation. Bankman-Fried purchases Zhao's stake for approximately 2 billion.
September 2021
FTX relocates its headquarters from Hong Kong, to the Bahamas.
January 2022
FTX announces that its $2 billion venture, FTX Ventures, has raised $400 million in Series C financing at a $32 Billion valuation.
February 2022
FTX.US announce that the company would soon begin offering stock trading to its US customers.
July 2022
FTX has reached a deal that gives it the option of buying BlockFi, a digital asset lender, for approximately $240 million.
September 2022
FTX.US won its auction big for the digital assets of bankrupt crypto brokerage Voyager Digital for approximately $1.42 billion. (In December 2022, FTX went bankrupt and rival exchange Binance was able to bid for Voyager's assets at approximately $1 billion.
October 2022
Bloomberg reports on the close relationship between Almeda and FTX.
November 2022
CoinDesk releases a report further exposing Alameda and FTX's close ties and FTX files for bankruptcy in the days that follow.
What is the FTX Scandal?
The collapse of FTX began on November 2 when the crypto news site, CoinDesk, reported that Alameda Research, held a position valued at $5 billion in FTT. Alameda's investment fund was also in FTT tokens. This raises concerns about Bankman-Frieds' unreported leverage and solvency.
The concerns caused rival exchange Binance to sell all their FTT tokens and customers followed suit, resulting in a bank run that cost FTX billions of dollars. FTX's liquidity crisis prompted Binance to make a non-binding deal with Binance to buy FTX. However, Binance did not proceed with the purchase after considering FTX’s mishandling of funds as well as their pending investigation.
The Securities Commission of the Bahamas froze the assets of FTX Digital Markets Limited, one of FTX's subsidiaries. FTX Japan then suspended operations. FTX Australia was placed under administration.
FTX filed for bankruptcy on November 11th, after it was found that they did not have sufficient assets to satisfy customer demand. Shortly after, FTX reported an alleged hack worth close to $500 million in FTT was moved out of FTX accounts. These funds were transferred by Bankman-Fried due to an internal mislabeling problem. However, no financial reporting is available from the crypto exchange as to why they were mishandled.
Bankman-Fried's balance sheets were not audited. This meant that there was no reliable record of the company's funds. It is evident that this lack of tracing was intentional, as FTX was funneling customer funds from FTX to Almeda - a reported amount of $10 billion with somewhere between $1-2 million unaccounted for. Despite Bankman-Fried's claims that FTX and Alameda Research were independent firms and to protect funds entrusted to the exchange, the false marketing of the exchange and misuse of customer funds appear to be a conscious effort.
CoinDesk's report raised concerns within the cryptocurrency industry about Bankman-Fried companies' leverage, solvency, and risk. This led to the collapse of the exchange, a 10-day down spiral, and Bankman-Fried being arrested.
What is FTX Founder Bankman-Fried Being Charged with?
Bankman-Fried was taken into custody on 12/12/2018 after a lawsuit against FTX. The suit claimed that Bankman-Fried had a fraudulent cryptocurrency scheme to exploit inexperienced investors throughout the U.S., which included celebrities and professional athletes. Later in December, he was released on a $250 million bond pending his trial. After https://collectid.io/what-the-ftx-collapse-means-for-the-future-of-blockchain-and-nft-technology/ conducted by United States Securities and Exchange Commission and Commodity Futures Trading Commission, he is being charged with the following 8 crimes:
Two counts of conspiracy to commit wire fraud
Two counts of wire fraud
Money laundering conspiracy
Commitment to commodities fraud by conspirators
Conspiracy to commit securities fraud
Conspiracy to defraud America and commit campaign finance violations
On January 3, 2023, the ex-CEO pleaded guilty to federal fraud charges.
What does the FTX scandal have to do with NFT and blockchain?
As the dust settles on the recent FTX flop, it's natural to wonder what the future holds for other cryptocurrency exchanges, blockchain, and NFTs. It is easy to conclude that the collapse of the crypto exchange was due to the newer technology of blockchain and NFTs. However, the root of FTX's collapse was not a problem with the security and reliability of the blockchain and NFTs, but rather a problem of deceit, improper financial reporting, and the misuse of customer funds. The safety, security, authenticity, and proof they provide is what the blockchain and NFTs are all about.
While it's difficult to predict exactly what will happen, here are a few predictions on where things may be headed:
Blockchain technology will continue to mature and evolve, with a greater focus on scalability and user experience.
Due to the increasing popularity of blockchain technology, especially in the financial sector, the industry does face scalability issues as a newer technology. Many scalability problems have resulted, including increased transaction times, network transaction fees and electricity consumption (enough power to power the whole country of Switzerland). These issues can make systems slow and more costly for users. These issues can be addressed to improve the user experience and address sustainability issues.
NFTs will continue to gain traction as a way to authenticate and monetize digital assets, including art, music, and collectibles.
Despite the fact that the collapse and bankruptcy of FTX have cast doubt on the financial industry, it appears this is a temporary setback. The future still looks promising for NFTs as a whole. Here are a couple of predictions of anticipated areas for NFT growth:
Gaming and the metaverse: NFTs are expected to grow tremendously in video games and the metaverse. http://bit.ly/3GWiqgJ in-game (e.g. Play to Earn, Move to Earn) will elevate to new levels and their associated NFTs may be used to prove the credibility of a gamer or as a means to access virtual events. Outside the gaming experience, metaverse events such as concerts, conferences, and parties will be accessed through digital avatars, assets, tickets, and memorabilia in the form of an NFT.
Ticketing. Events such as concerts and sporting events will use increasingly NFTs to allow attendees in and offer dynamic, in-event promotions and offers.
Music: More music artists may adopt NFTs for their music to showcase their talent, interact with their fans, and earn royalty from their NFTs.
The Digital Twin: The idea of a physical item's "digital twin" will increase over the next year. To improve sustainability, traceability, customer engagement, and experiences, companies will equip their products using NFC technology.
Growth isn't always linear, just like any other industry. The market for NFTs may experience ups and downs but overall has a bright future as more people become aware of and interested in this exciting new technology.
What do you think? What are your thoughts on NFTs and blockchain? Share your thoughts in the comments below!