What the FTX Collapse Means for the Future of Blockchain and NFT Technology

on January 11, 2023

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.”

Two years after Alameda was founded, Bankman-Fried launched FTX as a crypto exchange completely independent of Alameda (or so we thought). 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.

To support his claim that FTX and Alameda were “wholly separate” entities, Bankman-Fried stepped down as CEO at Alameda in 2019. 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. Unfortunately, the relationship between the two companies does not 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 is an abbreviation 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. The FTX platform used an incentives system that included better referral rates, free daily ERC20/ETH withdrawals (up to 1000 per day), and a higher probability of airdrops as benefits to FTT holders. Additionally, the exchange token has a centralized collateral pool meaning the collateral pool will increase in value when markets are volatile. This limits transaction fees and ensures users can easily trade.

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 FTX CEO?

Before the company went under, the CEO of FTX was Sam Bankman-Fried. 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.

Sam Bankman-Fried
Sam Bankman-Fried

A Brief Timeline of FTX

May 2019

FTX is founded by Sam Bankman-Fried and his roommate, Gary Wang.

November 2019

Changpeng Zhao of Binance purchases a 20% stake in FTX for approximately $100 million.

August 2020

FTX acquires cryptocurrency portfolio tracking app, Blockfolio, for $150 million.

July 2021

FTX raises $900 million at an $18 billion valuation from over 60 investors and Bankman-Fried buys out Zhao’s stake for approximately $2 billion.

September 2021

FTX moves its headquarters from Hong Kong to the Bahamas.

January 2022

FTX announces its $2 billion venture, FTX ventures, raising $400 million in Series C funding at a $32 billion valuation that month.

February 2022

FTX.US announce that the company would soon begin offering stock trading to its US customers.

July 2022

FTX finalized a deal giving it the option to buy digital asset lender, BlockFi, for about $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. (Following the bankruptcy of FTX in December of 2022, rival exchange Binance won the bid to buy the assets of Voyager for 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. The report also revealed that Alameda’s investment foundation was in FTT tokens, ultimately raising concerns about Bankman-Fried’s companies’ undisclosed 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 spurred a non-binding agreement with Binance to purchase FTX, which Binance ultimately did not move forward with after considering FTX’s reported mishandling of funds and their pending investigation.

On November 10, the Securities Commission of the Bahamas froze the assets of one of FTX’s subsidiaries, FTX Digital Markets Ltd. FTX Japan suspended its operations and the FTX Australian subsidiary was placed under administration.

On November 11, FTX filed for bankruptcy after not having sufficient assets to meet customer demand. Shortly after, FTX reported an alleged hack worth close to $500 million in FTT was moved out of FTX accounts. Bankman-Fried blamed these transfers on an internal mislabeling issue, however, there is no clear financial reporting from the crypto exchange on why those funds were mishandled.

While most companies produce several balance sheets a year, Bankman-Fried’s were never audited, meaning there was no reliable track of the company’s money. 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.

In short, CoinDesk’s report raised concerns in the cryptocurrency industry regarding Bankman-Fried’s companies’ leverage and solvency concerns, leading to the 10-day downward spiral and collapse of the exchange and the arrest of Bankman-Fried.

What is FTX Founder Bankman-Fried Being Charged with?

Bankman-Fried was arrested on December 12 following a lawsuit against FTX alleging that Bankman-Fried’s company was a fraudulent cryptocurrency scheme designed to take advantage of inexperienced investors across the U.S., including several celebrities and professional athletes. Later in December, he was released on a $250 million bond pending his trial. After an investigation 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 wire fraud conspiracy
  • Two counts of wire fraud
  • Conspiracy to commit money laundering 
  • Conspiracy to commit commodities fraud
  • Conspiracy to commit securities fraud
  • Conspiracy to defraud the United States and commit campaign finance violations

The ex-CEO pleaded not guilty to his federal fraud charges on January 3, 2023.

What does the FTX scandal mean for the future of blockchain and NFT?

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. With blockchain and NFTs as relatively newer concepts for people, it is easy to assume that this new technology caused the downfall of the crypto exchange. 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. In reality, the core of blockchain and NFTs is the safety, security, and proof of authenticity they provide.

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. As a result, several scalability issues have occurred such as increased transaction time, network transaction fees, and electricity usage (enough to power the entire country of Switzerland). Issues like this make systems slower and more expensive for users. Focusing on addressing these issues will be important for improving the overall user experience and tackling sustainability issues.

NFTs will continue to gain traction as a way to authenticate and monetize digital assets, including art, music, and collectibles.

While the FTX bankruptcy and collapse created doubt in the finance industry, this only appears to be a 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. In-game assets (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 like concerts and sporting events will increasingly use NFTs in the form of the event ticket to admit attendees into the event and provide dynamic, in-event offers and promotions.
  • 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. Companies will equip their products with NFC technology to improve sustainability initiatives, traceability, and customer engagement and experiences.
Atletico Mineiro and collectID FTX
Atlético Mineiro – digital twin of football jersey

Like any industry, growth isn’t always linear. 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’s your take on the future of blockchain and NFTs? Share your thoughts in the comments below!

About Tessa

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