Crypto exchange files for bankruptcy

Introduction

Samuel Bank Friedman

Samuel Bankman-Fried, also known as SBF, 32, of Stanford, California, was sentenced to 25 years in prison, three years of supervised release, and ordered to pay $11 billion in forfeiture for his orchestration of multiple fraudulent schemes. Bankman-Fried, who was the founder of the cryptocurrency exchange FTX and the cryptocurrency trading firm Alameda Research, misappropriated billions of dollars of customer funds deposited with FTX, defrauded investors in FTX of more than $1.7 billion and defrauded lenders to Alameda of more than $1.3 billion. Bankman-Fried was previously found guilty of two counts of wire fraud, two counts of conspiracy to commit wire fraud, one count of conspiracy to commit securities fraud, one count of conspiracy to commit commodities fraud, and one count of conspiracy to commit money laundering.

Sam Bankman-Fried was one of the richest people in crypto, thanks to his FTX exchange and Alameda Research trading firm before his empire came crashing down in November 2022.

After users began withdrawing their investments from FTX at a rapid pace, Bankman-Fried filed for bankruptcy for FTX, FTX's U.S. operations, and Alameda Research.

It's a stunning fall from grace for Bankman-Fried, who had been heralded as a modern J.P. Morgan for swooping in to save troubled crypto firms before his firm blew up.

The son of two Stanford law professors, he studied physics at MIT and traded ETFs at a quant firm before pivoting to crypto trading in late 2017.

He launched FTX in 2019 and grew it into one of the leading exchanges for buying and selling crypto derivatives. In early 2022, investors valued FTX and its U.S. operations at a combined $40 billion.

Most of his wealth, which peaked at an estimated $26.5 billion, was tied up in ownership of about half of FTX and a share of its FTT tokens.

Genesis and Gemini

Under an investment program called Gemini Earn, customers once lent their digital assets to Genesis in exchange for interest payments. But they lost access to their more than $1 billion worth of crypto when Genesis suspended redemptions in November 2022, just days after the implosion of crypto exchange FTX.

Genesis Agrees to Pay $21 Million Penalty to Settle SEC Charges

The Securities and Exchange Commission announced that Genesis Global Capital, LLC agreed to a final judgment ordering it to pay a $21 million civil penalty and imposing a permanent injunction to settle charges that it engaged in the unregistered offer and sale of securities through a crypto asset lending program known as the Gemini Earn program. Under the terms of the settlement, the SEC will not receive any portion of the penalty until after payment of all other allowed claims by the bankruptcy court, including claims by retail investors in the Gemini Earn program.

Genesis Global Capital

Genesis Global Capital, LLC provides financial services. The Company specializes in lending and borrowing services for digital assets and fiat currency to and from institutional and HNWI clients. Genesis Global Capital serves customers globally.

Industry Analysis

Is Crypto Failing？

The perception of whether crypto is failing or not can vary depending on individual perspectives and the specific context being considered. However, there are several factors that some may point to as contributing to concerns about the potential failure of the cryptocurrency industry:

Volatility: Cryptocurrency markets are notoriously volatile, with prices capable of experiencing rapid and substantial fluctuations. This volatility can deter mainstream adoption and investment, as it introduces a significant risk for investors and businesses.

Regulatory Uncertainty: Regulatory frameworks for cryptocurrencies and blockchain technology vary significantly from one jurisdiction to another and are often unclear or subject to change. Regulatory uncertainty can create challenges for businesses operating in the crypto space and may hinder broader adoption by institutions and retail investors.

Security Concerns: While blockchain technology is touted for its security features, the cryptocurrency industry has been plagued by hacking incidents, exchange breaches, and scams. These security concerns can undermine trust in the technology and deter participation in the market.

Lack of Scalability: Scalability remains a significant challenge for many blockchain networks, particularly those of popular cryptocurrencies like Bitcoin and Ethereum. High transaction fees and slow processing times can limit the practicality of using cryptocurrencies for everyday transactions or as a scalable alternative to traditional payment systems.

Environmental Impact: The energy consumption associated with certain proof-of-work blockchain networks, such as Bitcoin, has raised concerns about their environmental impact. Critics argue that the energy-intensive mining process contributes to carbon emissions and exacerbates climate change, leading to calls for more sustainable alternatives.

what is FTX Stock？

FTX Stock refers to a digital asset representing ownership in FTX, one of the leading cryptocurrency exchanges in the world. FTX offers a wide range of financial products and services, including spot trading, futures trading, options trading, tokenized stocks, and more.

FTX Stock tokens are a unique feature offered by the FTX exchange, allowing users to trade fractional ownership of shares of popular publicly traded companies, such as Apple, Amazon, Tesla, and others, directly on the FTX platform. These tokens are backed by the actual shares held by FTX's custodian, providing users with exposure to traditional financial markets without the need to use traditional brokerage services.

By offering FTX Stock tokens, FTX aims to bridge the gap between traditional finance and the cryptocurrency ecosystem, providing users with access to a diverse range of investment opportunities seamlessly and efficiently. However, it's important to note that FTX Stock tokens are synthetic derivatives and do not grant voting rights or dividends associated with the underlying shares.

FTX Story

What happened to FTX？

FTX and FTX.US crashed due to a lack of liquidity and mismanagement of funds, followed by a large volume of withdrawals from rattled investors. The value of FTT plummeted, taking other coins down with it, including Ethereum and Bitcoin, which reached a two-year low on Nov. 9, 2022. Other exchanges were affected by the FTX collapse, including BlockFi, which filed for bankruptcy on Nov. 28, 2022.

FTX is a now-defunct cryptocurrency exchange founded by Sam Bankman-Fried in 2019, who served as CEO until Nov. 11. The exchange issued its token, FTT, and was the fourth-largest crypto exchange by volume as of Nov. 9.

Bankman-Fried also founded a crypto trading firm called Alameda Research; CoinDesk reported on Alamedas troubled balance sheet on Nov. 2. Its largest assets, according to the report, are billions of dollars worth of FTT.

The CEO of rival exchange Binance, Changpeng Zhao, also known as CZ, tweeted on Nov. 6 that he was planning to sell off Binance‘s stockpile of FTT because of “recent revelations that have come to light,” referring to the Nov. 2 CoinDesk report of FTX and Alameda’s blurred funds. He compared FTX‘s situation to the crash of TerraUSD and LUNA in 2022 which tanked the crypto market and cost investors billions of dollars. But typically, such moves aren’t announced publicly.

Zhao‘s announcement led to a rapid decline in FTT’s value over the next day as suspicion grew that FTX didnt have the liquidity needed to back transactions and stay afloat. The value of other coins — including BTC and ETH — declined as well, with Bitcoin dropping to a two-year low. Bankman-Fried said in a tweet on Nov. 10 that the platform saw $5 billion in withdrawals on Nov. 6.

FTX Selling Assets and FTX Filing

Cryptocurrency exchange FTX, which went bankrupt in November 2022, announced that almost all of its customers could get back what they lost in cash, and then some, under a newly proposed plan.

According to late Tuesday filings submitted by FTX to the U.S. Bankruptcy Court for the District Court of Delaware, FTX will have between $14.5 and $16.3 billion in cash after it sells all of its assets — more than enough to cover the $11.2 billion it owes non-government creditors.

Most (98%) of FTX's creditors are customers with claims of $50,000 or less.

If the court approves the proposed plan, this group of two million people will receive 118% of their allowed claims in cash within 60 days.

The percentage is “100% of bankruptcy claim amounts plus interest,” per FTX CEO John Ray, who took charge after FTX collapsed. He also led Enron through bankruptcy.

FTX Building

Before his FTX cryptocurrency exchange collapsed and he was tried for fraud, Mr. Bankman-Fried ran a global business empire spanning Berkeley, California, Hong Kong and the Bahamas.

The 31-year-old mogul started his first company in the San Francisco Bay Area, then moved to Hong Kong and then to the Bahamas, where his FTX cryptocurrency exchange resided until he filed for bankruptcy in November. Along the way, Mr. Bankman-Fried has left his mark at his mansion in Washington, D.C., and on the island of New Providence in the Bahamas, as well as splashing the FTX logo on a basketball court in Miami.

In 2019, Mr. Bankman-Fried moved from Alameda to Hong Kong, where the regulatory environment is friendlier to cryptocurrency companies. He soon started a new company, FTX, which people can use to buy and sell cryptocurrencies

As FTX grew, Mr. Bankman-Fried invested heavily in marketing and secured celebrity endorsements. In 2021, he signed a 19-year, $135 million contract to rebrand the Miami Heat's basketball arena as FTX Arena. The deal was canceled after FTX filed for bankruptcy.

Mr. Bankman Fried was a force in political fundraising. He purchased a $3 million luxury townhouse in Washington, D.C., to serve as a base for his political operations and as the headquarters for a non-profit organization run by his brother, Gabe Bankman-Fried.

One of Mr. Bankman-Fried's last stops in the Bahamas was a bright pink courthouse in the capital of Nassau. He was taken there after his arrest in December before he was extradited to face charges in the United States.

FTX Lawsuit

what is FTX Lawsuit？

FTX investors sued Sullivan & Cromwell, accusing the law firm of aiding illicit schemes that helped advance a multi-billion dollar fraud before the crypto exchanges collapse.

Sullivan & Cromwell‘s services “went well beyond those a law firm should and ordinarily provides,” the investor complaint said. “Lawyers were eager to craft not only creative but misleading strategies that furthered FTX’s misconduct.”

The lawsuit filed Feb. 16 on behalf of a proposed class of FTX customers adds to the scrutiny of the elite Wall Street law firm that has acknowledged working on 20 legal matters for FTX and its founder Sam Bankman-Fried in the 16 months before the exchanges 2022 implosion amid reports of a liquidity crisis.

Sullivan & Cromwell declined to comment. The firm has previously said it had a “limited” relationship with FTX and that it reported concerns to federal law enforcement after learning of the exchanges problems.

The Moskowitz Law Firm, which is behind actions against Tom Brady and other celebrity endorsers of FTX, brought the suit in Miami federal court. Sullivan & Cromwell “actively participated” in the FTX fraud through legal work that gave it deep insight into the exchanges inner workings, investors allege. Firm lawyers knew where customer money was held and about the “untruthful and fraudulent conduct and misappropriation” of the money, the investors claim.

The lawsuit makes Sullivan & Cromwell the second law firm to face an investor lawsuit over allegedly aiding and abetting FTX fraud.

Fenwick & West, a Silicon Valley law firm which worked as the crypto exchanges main corporate counsel, is facing a separate action along with venture and private equity firms such as Sequoia Capital, Thoma Bravo and Paradigm.

Bankman-Fried in November was convicted of fraud and conspiracy for siphoning customer money into an affiliated hedge fund for risky investments, political donations, and expensive real estate.

Silicon Valley Bank Crypto

Silicon Valley Bank (SVB) is a well-known financial institution that primarily serves the technology and innovation sectors, particularly in Silicon Valley and other tech hubs around the world. While SVB has not traditionally focused exclusively on cryptocurrencies, it has shown interest in and support for the cryptocurrency and blockchain industries in various ways:

Banking Services: SVB provides banking services to a wide range of clients in the technology sector, including cryptocurrency exchanges, blockchain startups, and other companies involved in the crypto space. These services may include deposit accounts, wire transfers, foreign exchange, and other financial products tailored to the needs of tech companies.

Venture Capital: SVB's venture capital arm, SVB Capital, has made investments in cryptocurrency-related startups and blockchain technology companies. This includes providing funding to early-stage companies developing innovative blockchain solutions, digital asset infrastructure, decentralized finance (DeFi) projects, and more.

Industry Partnerships: SVB has formed partnerships and collaborations with leading players in the cryptocurrency and blockchain industries. These partnerships may involve joint initiatives, co-branded events, educational programs, and other activities aimed at fostering innovation and growth in the crypto ecosystem.

Research and Thought Leadership: SVB periodically publishes research reports, market analyses, and thought leadership pieces on emerging trends and developments in the cryptocurrency and blockchain space. These insights help inform SVB's clients and the broader tech community about opportunities and challenges in the crypto industry.

Market Speculations

Did Binance Buy Voyager？

Binance.US has pulled out of a $1.3 billion agreement to purchase the bankrupt crypto lender Voyager.

The deal was announced at the end of last year and was precipitated by Voyager's bankruptcy, which was filed in July.1 The exchange blamed the “hostile and uncertain regulatory climate in the United States” for creating an unstable environment where the deal could not move forward.2

In mid-March, the Department of Justice appealed Voyager's bankruptcy plan. The government said the bankruptcy protections and subsequent sale of the company's assets to Binance would approve illegal transactions and unregistered securities.3

At the end of March, a judge temporarily paused the deal to allow federal officials time to challenge the transaction. Voyager's lawyers warned that Binance might cancel the deal because of the delay.

For its part, Voyager said it would move forward with the Chapter 11 process by directly distributing cash and crypto to its customers.4 The company will have more information on that process for customers in the coming days. Binance will be required to destroy any information about Voyager customers, the bankrupt lender said.

Voyager was one of the many victims of the “crypto winter,” and went bankrupt last summer after the crash left it unable to honor withdrawals from its users. The sale process had been difficult from the start when FTX won the bid for the company and subsequently collapsed.

Voyager Claims

Bittrex Bankruptcy

Bittrex filed for bankruptcy protection in May, shortly after the U.S. Securities and Exchange Commission charged it with operating an unregistered securities exchange. Bittrex chose to shut down its U.S. operations and return assets to customers in the wake of the SEC complaint

crypto exchange files for bankruptcy

Bankruptcies Leave Crypto Investors Unable to Withdraw

The bankruptcies of Voyager and Celsius highlight the unique risks that cryptocurrency holders and investors face when trusting crypto firms with their funds. These two incidents alone could lead to well over $1 billion in investor losses.

Voyager filed for bankruptcy protection on July 1, 2022.4 The company said customers should get all U.S. dollar deposits returned but cant say what portion of their crypto holdings will be returned to customers. It claimed it held $1.3 billion in customer crypto assets on its platform as of the bankruptcy filing.

Celsius Network, a large cryptocurrency lending platform, filed for bankruptcy protection on July 13, 2022. The filing came about a month after Celsius paused all withdrawals, swaps, and transfers among customer accounts. In a filing with the U.S. Bankruptcy Court in New York, Celsius shared that it owes roughly $1.2 billion more than it has on hand.

Who Gets Priority During a Bankruptcy？

During Chapter 11 bankruptcy proceedings, theres a clear chain of who gets paid for the remaining assets. Even if a company owes $1 billion more than it has in assets, investors may not be left empty-handed.

The bankrupt company must produce a detailed schedule of assets and liabilities, among other financial statements and reports. During the bankruptcy process, the company, lawyers, and a bankruptcy judge work to figure out who gets what.

The legal code states that, in general, the first payments are made to secured creditors. Once those obligations are met, funds go to repay debts to unsecured creditors. Investors are nearly last in line when it comes to recovering their assets.

When the pool of assets to be returned to individual investors is calculated, everyone is notified of the pro rata share that they will receive. For example, if the company owes $100 million to customers and has $90 million left after paying off debt, then customers would get approximately 90% of their deposits returned.