Investigating the Collapse of FTX, Part I (EventID=115246)

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On Thursday, December 13, 2022, at 10:00 a.m. (ET) full Committee Chairwoman Waters and Ranking Member McHenry will host a hybrid hearing entitled, “Investigating the Collapse of FTX, Part I."

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Witness for this one-panel hearing will be:

• John J. Ray III, Chief Executive Officer, FTX Group


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Overview

FTX, a global cryptocurrency trading platform (or crypto exchange), was co-founded by former Chief Executive Officer (CEO) Sam Bankman-Fried and former Chief Technology Officer (CTO) Gary Wang in 2019. FTX allowed users to buy, sell, hold, and lend many cryptocurrencies, as well as trade on margin derivatives of these cryptocurrencies. FTX, at its peak, was the third-largest crypto exchange in terms of daily trading volume (behind Binance and Coinbase). The main FTX exchange was valued at $32 billion at its recent funding rounds in January and in the fall of 2022. FTX is headquartered in the Bahamas and was previously headquartered in Hong Kong. FTX engaged with U.S. customers via a separate entity, FTX.US, which was valued at $8 billion, although it has been reported that U.S. customers may have also engaged with the non-US FTX exchange using virtual private networks. Mr. Bankman-Fried was also the owner and founder of Alameda Research (Alameda), an unregistered crypto asset trading and venture capital firm, founded in 2017.

Crypto exchanges often offer their own cryptocurrencies, known as exchange tokens, in order to distinguish themselves from other competitors. Exchange tokens can offer a range of benefits including trading fee discounts, rebates, and early access to token sales. Like other centralized cryptocurrency exchanges,11 FTX created its own exchange token called FTT. The FTT token debuted in 2019 and a few years later was valued at approximately $80. The discounted trading fees benefited traders using the FTX platform and FTX offered users holding over $100 worth of FTT a 3% discount when trading on the exchange. On the FTX website, FTT was described as “"the backbone of the FTX ecosystem,” yet customers were not aware that tens of millions of those tokens were not widely distributed, which would impair the market’s ability to price or value the token. Ultimately, a large, previously unknown, amount of FTT belonged to FTX, and appears to have been valued on the FTX balance sheet using the public FTT value, which was based on the smaller known number of tokens. Additionally, FTX’s balance sheet was also propped up by tokens FTX received as collateral from Alameda when Alameda borrowed billions from FTX. These tokens, Serum, Oxygen, Maps, and Bonfida, were issued by affiliates of Mr. BankmanFried18 and were controlled by him or Alameda Research. The four tokens were likely worth much less than the FTX balance sheet entry of $6.4 billion.

Neither the main FTX exchange nor FTX.US were registered and overseen by the SEC or CFTC. However, FTX.US was registered as a Money Services Business (MSB) with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), and FTX listed almost all states as “States of MSB Activities,” excluding New York. FTX US Derivatives was registered with CFTC since 2017 as a designated contract market (DCM), swap execution facility (SEF), and derivatives clearing organization (DCO). This allowed FTX to operate a derivatives trading platform in the U.S. in addition to cryptoasset trading. FTX.US, through acquisitions, also owned FTX Capital Markets, LLC, which is an SEC registered broker-dealer and Embed Clearing LLC, a securities clearing firm registered with the SEC. Another entity owned and controlled by FTX was LedgerPrime, which (until November 8, 2022) was registered with the SEC as an investment adviser.

Overview of Events

On November 2, the crypto media platform, CoinDesk, reported a leaked balance sheet from Alameda, that showed that $3.66 billion of its $14 billion in assets were “unlocked FTT.”25 $2.16 billion were listed as “FTT collateral,” meaning that over $5 billion of the company’s assets held in FTT. On November 6, in response to reporting that suggested FTX’s potential insolvency, Alameda CEO Caroline Ellison tweeted that the “balance sheet info which has been circulating recently” showed only a subset of Alameda’s corporate entities. Later that morning, Mr. Zhao, founder and CEO of Binance, tweeted that Binance would liquidate its holdings of FTT “due to recent revelations that have come to light.” Then Ms. Ellison offered to buy all of Binance’s FTT holdings...

Hearing page: https://financialservices.house.gov/events/eventsingle.aspx?EventID=410002