BY ANDREW R. CHOW
TECH
THE COLLAPSE OF THE CRYPTO exchange FTX seemed to materialize out of nowhere. In the space of one week in November, FTX went from one of the most trusted parts of crypto to a bankrupt disgrace that lost more than $8 billion of its customers’ money, according to authorities.
FTX’s founder Sam Bankman-Fried faces criminal charges, including fraud and money laundering. He is free on $250 million bail and entered an initial plea of not guilty on Jan. 3 in federal court in New York City.
While much of the press coverage has focused on Bankman-Fried allegedly spending customer money on political donations and a Bahamian real estate empire, it appears that a far greater amount of FTX money disappeared in the wake of an earlier and lesser-known crypto crash. Increasing evidence suggests that the May collapse of the highly controversial cryptocurrency TerraUSD (which some critics likened to a Ponzi scheme) may have started a chain-reaction financial crisis that brought down first Bankman-Fried’s hedge fund Alameda Research, which made many risky bets on cryptocurrencies, and finally FTX.
A recent report by the analytics firm Nansen—which followed transactions that are publicly visible on the blockchain—shows that after TerraUSD collapsed, hundreds of millions of dollars in crypto were transferred from FTX to major crypto lenders that Alameda may have owed money to. The links between Terra-USD and FTX could help explain how FTX’s losses mounted so quickly, and why it will be exceedingly difficult for customers to get their money back.
FTX, founded in 2019, allowed consumer investors to buy cryptocurrency and took deposits, similar to the way traditional financial institutions work. Alameda and FTX were supposed to operate separately from one another, but Nansen found a slew of blockchain evidence suggesting that the companies were likely entwined. The Commodity Futures Trading Commission (CFTC) alleged the same thing in a December complaint: that Alameda used FTX’s funds as an unlimited line of credit to trade with.
Bankman-Fried claims that the commingling of funds between Alameda and FTX was not purposeful, but resulted from his and others’ misreading of “confusing internal labeling,” he told Reuters.
Bankman-Fried largely concealed Alameda’s financial records, regulators allege, and its interplay with FTX seemed largely unremarkable until May 2022, when TerraUSD collapsed following a bank run. TerraUSD was a
