By now, the importance of cryptocurrency accounting and keeping accurate cryptocurrency records should be clear. If you’re involved in buying, trading, or selling cryptocurrency, you might remember the collapse of the cryptocurrency exchange FTX in early November of 2022. In fact, FTX founder and former CEO Sam Bankman-Fried stepped down and the company ended up filing for bankruptcy. Let’s take a closer look at the situation and determine what the root cause of the collapse really was.
Over a 10-day period in November 2022, FTX collapsed. The catalyst for its downfall was when CoinDesk unveiled on Nov. 2 that Alameda Research, the quant trading firm with extremely close ties to FTX, held an FTT position valued at approximately $5 billion, which is FTX’s native token.
When investors heard about the news, they began to trade out of FTT in large volumes. With so many loans collateralized against FTT, and with the selling pressure mounting, FTX had a big problem on its hands. To make matters worse, on Nov. 6th, Binance, the world’s largest crypto exchange, announced it would sell all of its FTT tokens, a value coming in at around $529 million.
At this point, FTX announces they are going through a liquidity crunch and are looking for a bailout in the fashion of a takeover or additional capital investors. For a brief moment, Binance, the company that had originally stated they would be selling their FTT tokens, considered executing an acquisition of FTX. However, after a brief period of due diligence, Binance walked away from the deal.
Why would Binance go from selling their FTT tokens to considering a takeover, and then ultimately back out of the deal altogether? During their brief period of due diligence, Binance uncovered poor cryptocurrency accounting which led to many holes in the FTX balance sheet. As it turns out, and unbeknownst to customers, FTX was taking customer funds and loaning them out to their sister company Alameda Research through what is known as a back-door. Unfortunately, Alameda lost nearly all of their customers’ funds through high-risk trades.
Through this scheme, FTX customers were completely blind to the actual use of their funds as their accounts appeared to be whole the entire time.
So what led to the ultimate demise of FTX? Fraud. While there are many sources out there that will mislead casual investors to believe the collapse of FTX was due to issues with cryptocurrency itself, that couldn’t be further from the truth. In fact, those involved in attempting to recover the mishandled funds are relying on the transaction trail and audibility provided by the blockchain to trace where customers’ funds ended up.
It’s never been more important to keep clean accounting records for both your cryptocurrency business or your personal trading. Having a seasoned team like Founder’s CPA on your side can give you peace of mind that you are making smart cryptocurrency decisions.
As tax season quickly approaches, make sure to reach out to our cryptocurrency accounting firm to assist you with all things cryptocurrency. Take advantage of our free consultations today!
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