🚀The $32 Billion FTX and Alameda Research Collapse

I spent a few minutes a day to follow the FTX Collapse to understand the things to avoid if I want to start a crypto company some time in the future.

The situation is something similar to Theranos with Elizabeth Holmes: huge valuations and being praised by the media. There's seems to be a pattern here.

He was in a talking spree recently even if his lawyers were against it.

🎥 New York Times Summit (https://www.youtube.com/watch?v=IyoGdwVIwWw)

Some speculations:

  • He has gone rogue coz he was against the bankruptcy

  • He's practicing for the actual hearing

Hearing Part 1

🎥 Video: https://www.youtube.com/watch?v=ovhBvQ5-vCY

⏱️ 00:30:30 - Start of Washington Post introduction

  • John Ray, the bankrupt expert and the current expert, is being paid $1,300 per hour

  • SBF's generous contributions to politicians will be donated to charity

  • Effective altruism - accumulate most amount of money and give that money to the best cause possible

  • The members of the committee have great backgrounds in the financial services

  • Some say that this one of the largest Ponzi Schemes ever

  • Authors of The Big Short and Social Network were supposed to write a book about SBF

  • Southern District of New York, SEC, and Commodity Futures Trading Commission have filed criminal charges

⏱️ 01:10:00 - Start of the hearing and introduction from the chairman

  • SBF was supposed to attend the hearing but he was arrested in the Bahamas

  • $32 billion valuation in 3 years then collapsed to zero in a day

  • Misused approximately $10 billion in customer funds

  • Owes creditors at least $3 billion

  • 1 million users in the US are locked out in their funds

  • Similar collapses this year: Terra, Celsius, Blockfi, Three Arrows Capital.

⏱️ 01:18:00 - North Carolina

  • 130 entities related to FTX and Alameda

⏱️ 01:22:45 - John Ray's opening statement and QA

  • Become CEO on November 11 and immediately filed for bankruptcy

  • Unacceptable management practices:

    • Senior management has access to customer assets without security controls in redirecting those assets

    • Private keys are not encrypted

    • Alameda Research can borrow unlimited client funds for investments

    • No proper record keeping of transaction

    • No proper governance

    • No internal controls

  • $5 billion was spent on investments and businesses. Many of which were worth a fraction

  • SBF had a large internal loans up to $1 billion

  • FTX and Alameda were not segregated

  • Alameda is a customer of FTX.com

  • FTX uses AWS

  • FTX US and International assets are distinct

  • SBF owns 90% of Alameda

⏱️ 01:38:15 - New York

  • No problems in retrieving offshore debtors coz most jurisdictions will cooperate with each other to protect the victims.

  • Secured over a billion dollars of assets stored in cold wallets and secured locations

  • Most creditors are located outside of the US

  • Basic regulations: records, controls, and segregate people's money

⏱️ 01:42:00 - Missouri 1

  • Budget requests are approved using emojis over Slack

  • QuickBooks for accounting. Not built for multi-billion dollar company.

  • No independent board.

  • FTX transferred several billions to Alameda. Full review is not yet done.

⏱️ 01:48:20 - California 1

  • Against crypto investments

  • SBF is just a 1 big snake in a crypto garden of eden.

  • To include Ryan Salame and Caroline Ellison in the investigation related to the bonuses and loans amount to $55 million

⏱️ 01:53:40 - Oklahoma

  • Some entities such as FTX Japan and LedgerX were not included in the bankruptcy since these entities are solvent.

  • LedgerX will be sold.

  • FTX customer funds are diverted to Alameda back accounts.

⏱️ 01:58:00 - Texas 1

  • Cases (SEC Complaint)

    • Wire fraud on customers

    • Wire fraud on lenders

    • Commodities fraud

    • Securities fraud

    • Money laundering

  • SBF attended Canada/USA math camp and has a bachelor's degree in Physics/Mathematics at MIT. Is this a one big mistake?

⏱️ 02:02:50 - Texas 2

  • Asking for specific affected dollars per entity. No specific numbers yet.

  • Working with Ernst & Young to properly review the company transactions

⏱️ 02:08:00 - Missouri 2

  • SBF's testimony is disrespectful.

  • There's more independent contractors over employees.

  • No employee insurance

⏱️ 02:12:35 - Missouri 3

  • FTX uses Alameda's bank account because FTX couldn't get its own bank account.

  • There's no accounting system that work in the crypto space.

  • FTX invested on Farmington State Bank at 10% stake. FTX paid 20x book.

⏱️ 02:17:40 - Colorado

  • Madoff Bankruptcy in 2008 just distributed the payment just last week of this hearing. 14 years after. How long would it take FTX to fix the situation?

  • How to evaluate fluctuation when paying the affected customers?

⏱️ 02:23:30 - Michigan

  • FTX shares findings to the SEC and Southern District of New York as the company is being reviewed

  • Small number of FTX US users are using FTX International

  • Investigating the involvement of SBF's parents in the company

    • The parents received payments from FTX

⏱️ 02:28:40 - Ohio

  • To limit the harm caused to the FTX users

  • How many users have lost money and when will they get their money back?

    • FTX is securing assets everyday by looking for wallets to maximize the recovery.

    • 2.7 million users on FTX US and 7.6 million users on FTX.com

⏱️ 02:34:25 - Kentucky

  • Set-up independent board of directors

  • Governance structure applies to all entities

  • Investigating funds under the FTX Foundation (Climate and Community). Assets are still co-mingled

  • There are audits but can't be trusted

⏱️ 02:39:40 - California 2

  • Not into crypto.

⏱️ 02:44:12 - Texas 3

  • Recovered over $1 billion in assets

⏱️ 02:47:45 - Guam

  • Have you been able to pin point the specific cause of the collapse?

    • Unlimited ability to borrow customer funds

    • Margin trading

    • Excessive spending

  • Lost in excess of $7 billion

  • Wants to know the root cause to initiate a regulatory response

⏱️ 02:53:00 - Arkansas

⏱️ 03:00:00

  • Smartest investors (Sequoia Capital) but didn't do due diligence properly

Extravagant marketing spend:

  • Superbowl ad

  • Tom Brady

  • Kevin O'leary

  • FTX Arena with Miami Heat

  • Baseball players

  • Formula One

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