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FTX

From Invertopedia, the encyclopedia of how things fail

Entry 003. An analysis built from the public record, not an insider account. Spot an error? Tell us.

FTX was a crypto exchange founded in May 2019 by Sam Bankman-Fried and Gary Wang, and valued at $32 billion in January 2022[1]. The SEC alleged that customer deposits were quietly diverted to Alameda Research, Bankman-Fried's own crypto hedge fund[6]. A run in November 2022 exposed the hole and FTX filed for bankruptcy on November 11[1][2]. At sentencing the judge found customers had lost $8 billion, and Bankman-Fried was given 25 years in prison[3].

Contents
  1. 1The bet
  2. 2What happened
  3. 3The kill shot
  4. 4Red flags ignored
  5. 5The cost
  6. 6The inversion
  7. 7What survived
  8. 8References

The bet

That an exchange and a trading firm with the same owner could share one pool of money without anyone getting hurt. According to the SEC, Alameda got a nearly unlimited "line of credit" funded by FTX customers and was exempted from key FTX risk controls, and investors were not told[6].

That Alameda's assets would always be enough to cover what it had taken. Bankman-Fried claimed customers would be paid in full. Judge Lewis Kaplan called that claim "misleading" and "speculative"[3].

What happened

May 2019Sam Bankman-Fried and Gary Wang found FTX.[1]
Jan 31, 2022FTX raises $400 million, including from SoftBank, at a $32 billion valuation.[1]
Nov 2, 2022CoinDesk reports a balance sheet showing Alameda's $14.6 billion in assets. The largest single asset is $3.66 billion of FTX's own token, FTT. Liabilities are $8 billion.[7]
Nov 6, 2022Binance CEO Changpeng Zhao says Binance will sell its FTT holdings.[1]
Nov 8 – 9, 2022Binance agrees to buy FTX, then walks away the next day, saying "the issues are beyond our control or ability to help." FTX has seen about $6 billion in net withdrawals in a few days.[8]
Nov 11, 2022FTX, Alameda and about 130 affiliates file for Chapter 11. Bankman-Fried resigns and John J. Ray III takes over.[2][1][9]
Dec 12, 2022Bankman-Fried is arrested in the Bahamas at the request of the U.S. government.[10]
Nov 2, 2023A jury finds Bankman-Fried guilty on seven fraud and conspiracy counts.[3]
Mar 28, 2024Sentenced to 25 years in prison and ordered to forfeit more than $11 billion.[3][11]
Jun 12, 2026The Second Circuit upholds the conviction and the sentence. In September Bankman-Fried asks the Supreme Court to hear the case.[4][12]

The kill shot

Customer deposits were treated as the trading firm's money. When customers asked for it back all at once, it was not there.

The run was the trigger, not the cause. FTX had already given Alameda a nearly unlimited line of credit funded by customers and exempted it from key risk controls[6]. When lenders asked Alameda to repay loans in 2022, prosecutors said Bankman-Fried used FTX customer funds to repay them[11]. A balance sheet built largely on FTX's own token could not survive the first loss of confidence[7].

The appeals court put it plainly: "FTX customers were defrauded as soon as Bankman-Fried transferred their money to Alameda," whatever Bankman-Fried believed about paying it back later[4].

Red flags ignored

  • The exchange and the hedge fund had the same owner. Alameda was Bankman-Fried's privately held fund, trading on the exchange he ran[6].
  • One customer played by different rules. Alameda was exempted from key FTX risk controls and given a line of credit funded by customers, according to the SEC[6].
  • The collateral was home-made. Alameda's biggest asset was FTT, a token FTX itself issued[7].
  • Customer money paid for other things. The SEC alleged that customer funds held at Alameda went into venture investments, real estate and large political donations[6].

The cost

Judge Kaplan found that FTX customers lost $8 billion, equity investors $1.7 billion and lenders to Alameda $1.3 billion[3]. Bankman-Fried was ordered to forfeit more than $11 billion[11].

The bankruptcy has since paid creditors more than their claims, but in dollars, not coins. Claims were valued at November 2022 prices, so customers missed the crypto rally that followed[13]. After the fourth distribution of about $2.2 billion on March 31, 2026, U.S. customers had received 100% of their claims and FTX.com customers 96%[14]. A fifth distribution of about $900 million on July 31, 2026 took both customer classes to 105% and small "convenience" claims to 120%[5].

The inversion

Not your keys, not your coins. Treat an exchange balance as a loan to the exchange, hold only what you would be fine losing there, and never trust a venue whose owner also trades against it.

What survived

The money, mostly. John J. Ray III, who had overseen the liquidation of Enron, took over the estate[2]. The bankruptcy court confirmed FTX's plan on October 7, 2024, with an estimated $14.7 billion to $16.5 billion to distribute[15], and the first payouts began on February 18, 2025[16].

Bankman-Fried is serving his sentence in a low-security federal prison near Los Angeles and has asked President Trump for a pardon[4]. His petition to the Supreme Court was filed in September 2026[12].

References

  1. ^ “Timeline: The rise and spectacular fall of FTX”. Al Jazeera, December 13, 2022. Founding in May 2019 by Bankman-Fried and Gary Wang, the $32 billion valuation, Binance's November 2022 moves, the bankruptcy filing and the arrest.
  2. ^ “Crypto giant files for bankruptcy as CEO resigns in a stunning downfall”. CNN Business via KRDO, November 11, 2022. The Chapter 11 filing with about 130 affiliates, John J. Ray III taking over, and the $10 billion to $50 billion liability range.
  3. ^ “Sam Bankman-Fried sentenced to 25 years for FTX fraud worth over US$8B”. AP via Global News, March 28, 2024. The 25-year sentence, the November 2 verdict on seven counts, Judge Kaplan's loss findings ($8 billion customers, $1.7 billion investors, $1.3 billion lenders) and quotes.
  4. ^ “Sam Bankman-Fried Loses Appeal of Conviction for FTX Fraud”. Bloomberg Law, June 12, 2026. The Second Circuit upholding the conviction and sentence, Judge Parker's quote, the prison, and the pardon request.
  5. ^ “FTX Announces Fifth Distribution of Approximately $900 Million to Creditors on July 31, 2026”. FTX Recovery Trust via PR Newswire, July 17, 2026. The fifth distribution and cumulative recoveries of 105% for customers and 120% for convenience claims.
  6. ^ “SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX”. U.S. Securities and Exchange Commission, December 13, 2022. The alleged diversion of customer funds to Alameda, the line of credit and risk-control exemptions, the $1.8 billion raised from equity investors, and the Gensler quote.
  7. ^ “Divisions in Sam Bankman-Fried's Crypto Empire Blur on His Trading Titan Alameda's Balance Sheet”. CoinDesk, November 2, 2022. Alameda's $14.6 billion in assets, its FTT holdings and $8 billion in liabilities.
  8. ^ “Binance backs out of FTX acquisition deal”. The Block, November 9, 2022. Binance walking away, its statement, and about $6 billion in net withdrawals.
  9. ^ “Bankruptcy of FTX”. Wikipedia. Background timeline of the collapse.
  10. ^ “Sam Bankman-Fried, former FTX CEO, arrested in the Bahamas”. AP via PBS NewsHour, December 12, 2022. The arrest in the Bahamas at the request of the U.S. government.
  11. ^ “Bankman-Fried Sentenced to 25 Years in Prison for FTX Fraud”. Bloomberg Law, March 28, 2024. The forfeiture of more than $11 billion and the use of customer funds to repay Alameda's lenders.
  12. ^ “Bankman-Fried Asks Supreme Court to Review His Fraud Conviction”. Bloomberg Government, September 10, 2026. The petition to the U.S. Supreme Court.
  13. ^ “FTX customers may get their money back, but not gains from crypto price increases”. NBC News, May 8, 2024. Claims valued at November 2022 prices.
  14. ^ “FTX Recovery Trust to Distribute Approximately $2.2 Billion to Creditors in Fourth Distribution on March 31, 2026”. FTX Recovery Trust via PR Newswire, March 18, 2026. The fourth distribution and cumulative recoveries by class.
  15. ^ “FTX Receives U.S. Bankruptcy Court Confirmation of its Plan of Reorganization”. FTX via PR Newswire, October 7, 2024. Plan confirmation and the $14.7 billion to $16.5 billion distributable value estimate.
  16. ^ “FTX Commences Initial Distributions to Convenience Class and Sets Next Distribution”. FTX Recovery Trust via PR Newswire, February 18, 2025. The first distributions to creditors.
Categories: Crypto · Exchange · Collapsed in 2022 · Cause of death: fraud · From the public record