The Fall of FTX International: Insolvency and Contagion in the Crypto Market

In mid-November 2022, FTX International, a non-US cryptocurrency exchange, became effectively insolvent. The collapse of the exchange resulted from a combination of factors, including a failure to sufficiently hedge market exposure, a series of large market crashes, and involvement by the CEO of Binance.

The fallout from FTX International’s insolvency also impacted other companies in the crypto market, similar to how the collapse of Three Arrows Capital and the fall of Terra Luna affected Voyager, Genesis, Celsius, BlockFi, Gemini, and others. Despite the exchange’s insolvency, there remains potential for substantial recovery.

FTX US, a separate and fully solvent entity, should be able to return all customer funds. FTX International also has billions of dollars of assets, and the CEO has dedicated nearly all of its assets to customers.

Background on FTX International

FTX International was run outside of the US, regulated outside of the US, incorporated outside of the US, and took non-US customers. It was primarily headquartered, run from, and incorporated in The Bahamas as FTX Digital Markets LTD. US customers were onboarded to the separate and still solvent FTX US exchange.

The FTX Saga

The collapse of FTX International can be attributed to three main factors. Firstly, throughout 2021, Alameda’s balance sheet grew to roughly $100 billion of Net Asset Value, $8 billion of net borrowing (leverage), and $7 billion of liquidity.Secondly, Alameda failed to hedge its market exposure sufficiently. As a result, throughout 2022, a series of sizeable broad market crashes came-in in stocks and crypto-leading to a ~80% decrease in the market value of its assets.

Lastly, in November 2022, an extreme, quick, targeted crash precipitated by the CEO of Binance made Alameda insolvent. The contagion from Alameda’s collapse then spread to FTX and other places, similarly to how Three Arrows, etc., ultimately impacted Voyager, Genesis, Celsius, BlockFi, Gemini, and others.

Potential for Recovery

Despite the exchange’s insolvency, there remains potential for substantial recovery. FTX US remains fully solvent and should be able to return all customers’ funds. FTX International has many billions of dollars of assets, and the CEO has dedicated nearly all of its assets to customers.

Additionally, there were numerous potential funding offers, including signed letters of intent (LOIs) post-Chapter 11 filings, totaling over $4 billion. The CEO believes that, had FTX International been given a few weeks, it could have utilized its illiquid assets and equity to raise enough financing to make customers substantially whole.

Concerns about Conflict of Interest

Senators have raised concerns about a potential conflict of interest from Sullivan & Crowell (S&C), one of FTX International’s primary law firms prior to bankruptcy and FTX US’s primary law firm. S&C worked with FTX International on some of its most critical regulatory concerns and FTX US on its most important transaction. The CEO also visited S&C’s office in New York City when they were in town.

S&C and the General Counsel were the primary parties strong-arming and threatening the CEO into naming the candidate they chose as CEO of FTX, including for a solvent entity in FTX US, who then filed for Chapter 11 and chose S&C as counsel to the debtor entities.

To Conclude

The collapse of FTX International resulted from a combination of factors, including a failure to sufficiently hedge market exposure, a series of large market crashes, and a crash precipitated by the CEO of Binance.