FTX Exchange was a leading centralized cryptocurrency exchange, the world's third-largest in July 2021, specializing in spot markets, derivatives, options, volatility, and leveraged products. It was founded in 2018 by Sam Bankman-Fried, a Massachusetts Institute of Technology (MIT) graduate and former Jane Street Capital international exchange-traded funds (ETFs) trader.

FTX Exchange ran two trading arms: FTX, an international Bahamas-based platform, and FTX US, a separate U.S. affiliate where only U.S. residents could trade. In early November 2022, FTX, FTX US, and companies in their orbit unraveled from a steep fall from grace.

FTX Operations and Management

FTX was incorporated in Antigua and Barbuda and headquartered in The Bahamas after moving from Hong Kong in September 2021. Its FTX Digital Markets Ltd. unit was regulated by the Securities Commission of the Bahamas (SCB) and didn't offer cryptocurrency services to U.S. residents.

U.S.-based crypto traders could only access partner entity FTX US—a registered money services business (MSB) with FinCEN. In October 2021, FTX US completed its acquisition of cryptocurrency derivatives exchange platform LedgerX, rebranding it as FTX US Derivatives. FTX US Derivatives is licensed as a Derivatives Clearing Organization, Swap Execution Facility, and Designated Contract Market by the U.S. Commodity Futures Trading Commission (CFTC).

Though they had independent capital structures, FTX and FTX US had overlapping management, sources of capital, and marketing. Both companies shared investors, celebrity endorsements, and name-brand sponsorships and listed Bankman-Fried as chief executive officer (CEO) and co-founder Gary Wang as chief technology officer (CTO).

Every investor in FTX's Series C venture capital funding round simultaneously backed FTX US's Series A funding round. Participating investors included Temasek, Paradigm, Ontario Teachers' Pension Plan Board, NEA, IVP, SoftBank Vision Fund 2, Lightspeed Venture Partners, Steadview Capital, Tiger Global, and Insight Partners.

Promotional partnerships were signed with venture capitalist and "Shark Tank" reality TV personality Kevin O'Leary and NBA stars Stephen Curry and Shaquille O'Neal, who received equity stakes in FTX and FTX US. Naming rights were purchased for the Miami Heat's basketball court, to call it FTX Arena, and for the University of California, Berkeley's football stadium, to call it FTX Field.

FTX Security and Compliance

FTX used real-time, anti-money laundering compliance services to monitor user activity and notify account owners for further verification when large deposits and unusual transactions were detected. Customers had to verify identities through a Know Your Customer (KYC) process to obtain full trading, deposit, and withdrawal functionalities.

For hot and cold wallets underpinning all exchange assets, FTX claimed it had multiple layers of security oversight and that losses resulting from system-wide outages and hacks could be offset with a FTX Backstop Liquidity Fund said to be worth approximately $200 million as of September 2022.

FTX Products and Trading Pairs

FTX offered a comprehensive range of order types and easy-to-use desktop and mobile trading apps for cryptocurrency investors of all skill levels across key products including spot markets, options and futures contracts, leveraged tokens, and MOVE. Retail and institutional investors could tap into basic market orders and complex trailing stop orders for more than 300 cryptocurrency trading pairs such as BTC/USDT, ETH/USDT, XRP/USDT, and FTX's native exchange token FTT/USDT.

Futures: Traders could take both long and short bets capitalizing on small price movements on leading cryptocurrencies using more than 100 quarterly and perpetual futures pairs with margins of up to 101x. Stablecoins, such as USD Coin (USDC) and tether (USDT), were used as collateral to open and maintain positions.

Leveraged Tokens: FTX offered ERC20-based tokens that provided traders up to 3x leveraged exposure against the underlying trading pair. For instance, if a trader opened a BULL/USD - 3x long bitcoin token and bitcoin rallied 10% from the time of purchase, the leveraged token would gain 30%. FTX's leveraged tokens had no margin requirement.

Options: Traders could speculate on future price direction and hedge against their open positions with a range of call and put options that gave the holder the right but not the obligation to buy or sell at a future strike price.

MOVE: These contracts allowed traders to bet how far the price of a cryptocurrency would move over a time period, irrespective of the direction, essentially making them a play on volatility. As long as the price of the underlying cryptocurrency moved over a specific dollar amount—either up or down—the contract generated a profit.

Spot Markets: FTX offered more than 100 different spot trading pairs, providing exposure to leading cryptocurrencies such as Bitcoin, Ethereum, Binance Coin, Chainlink, and Ripple's XRP.

FTX US offered nearly 60 cryptocurrency spot trading pairs with fiat currencies, along with options contracts denominated in 0.01 Bitcoin and 0.1 Ether, cryptocurrency swaps, Bitcoin mini futures, and a marketplace for non-fungible tokens (NFTs).

While FTX US supported only the U.S. dollar, FTX served international customers and deposits and withdrawals via wire transfer in nine fiat currencies: the U.S. dollar, euro, British pound, Australian dollar, Canadian dollar, Swiss franc, Brazilian real, Ghanaian cedi, and Argentine peso. FTX also had restricted usage for the Turkish lira and Japanese yen and promised functionality for the Hong Kong dollar, Singapore dollar, and South African rand.

FTX Fees, Limits, and Payment Methods

FTX competitive futures and spot markets trading fees ranged from 0.04% to 0.07% for market takers, based on the maker and taker model, as of September 2022. Leveraged tokens carried a creation and redemption fee of 0.10% and a daily management fee of 0.03%.

FTX didn't charge deposit or withdrawal fees for most crypto assets. All bitcoin withdrawals greater than 0.01 bitcoin were free, as was one withdrawal of less than 0.01 bitcoin per day. Smaller follow-on bitcoin withdrawals were charged a 0.1% fee. Fiat currency withdrawals valued at more than $5,000 were free, as was one withdrawal per week below that amount.

FTX US trading fees for market takers ranged from 0.05% to 0.2%, as of September 2022. Fiat currency deposits could be made via wire transfer, ACH, debit or credit card, and Silvergate Bank's Silvergate Exchange Network, and all of these methods (except for debit and credit cards) could be used to withdraw fiat currency.

FTX wire transfer withdrawals over $5,000 USD were free. One withdrawal per week below that amount was also free, but subsequent wires incurred a $25 fee. There were no deposit fees for blockchain transfers. FTX US paid the withdrawal blockchain fees for all tokens except ERC20/ETH and small bitcoin withdrawals.

Non-fungible token fees varied on FTX and the location of the trade. For FTX US users, listing an NFT using its self-service tool cost $1, and each sale or trade charged 2% to the seller. The non-US FTX platform charged 5% fees to the buyer and seller on each side of the trade.

Customers with complete verification privileges were limited to single deposits of $20,000 and ACH deposits of up to $30,000 per 10-day rolling period without daily or lifetime withdrawal limits. Customers with less verification privileges were limited to single deposits of $2,999, ACH deposits of $500 for any rolling 10-day period, and a lifetime limit on withdrawals of $300,000.

FTX Bankruptcy, Lawsuits, and Convictions

FTX filed for Chapter 11 bankruptcy protection and announced CEO Sam Bankman-Fried's resignation on Nov. 11, 2022. In December 2022, Bankman-Fried was extradited from The Bahamas to the U.S., and together with other FTX executives was arrested and charged for engaging in behavior that prosecutors and regulators say amounted to fraud and money laundering and increased the likelihood of FTX becoming insolvent.

Criminal indictments from the U.S. Department of Justice (DOJ) and civil lawsuits from the U.S. Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) alleged the upper brass of FTX siphoned customer deposits and defrauded customers, investors, and lenders about its accounting with false statements that hid losses from the theft. Stolen funds were used to buy expensive real estate properties and yachts and to finance charities, political campaigns, and business ventures.

Bankman-Fried maintained his innocence in interviews and pled not guilty to his charges on Jan. 3, 2023, but was subsequently convicted by a jury on Nov. 2 at the end of a month-long trial that began Oct. 2. His associates had pled guilty and testified at trial that he played an active role in the alleged crimes. Bankman-Fried will attend a second trial on March 24, 2024, for charges connected to additional counts of fraud and bribery that federal prosecutors charged him with on Feb. 23 and to which he pled not guilty on March 30.

The new court-appointed FTX CEO, John J. Ray III, an American executive with experience reorganizing scandal-ridden companies such as bankrupt energy trader Enron, characterized FTX's collapse as a "complete failure of corporate control" and "old-fashioned embezzlement." Damian Williams, the U.S. Attorney for the Southern District of New York, the federal court prosecuting the exchange's former management, described FTX as "one of the biggest frauds in financial history."

A customer-led federal class-action lawsuit filed in November 2022 accuses FTX of being a fraudulent cryptocurrency scheme and Bankman-Fried and FTX's celebrity promoters, including Stephen Curry, Shaquille O'Neal, Shohei Ohtani, Naomi Osaka, Larry David, Tom Brady, and Kevin O'Leary, of duping unsophisticated U.S. investors. A Financial Times report claims Taylor Swift rejected a promotional partnership with FTX after vetting its regulatory risks.

FTX Spillover and Revival

FTX's collapse dealt a damaging blow to the crypto industry and removed chunks of liquidity from the market. Other than funds from FTX no longer being accessible, panicked withdrawals ensued at other crypto exchanges and crypto companies that had significant FTX exposure became financially troubled. When it shut down, FTX was the third-largest crypto exchange by volume and the crypto market lost billions of dollars in value.

Popular crypto exchanges, such as Crypto.com, laid off staff after suffering upticks in customer withdrawals. Some of the largest cryptocurrency brokers, Genesis Global, BlockFi, Celsius, and Voyager Digital, reduced their headcount, suspended banking and lending services, and became insolvent. Gemini, the crypto exchange founded by the Winklevoss twins, paused withdrawals from its Earn investment program and sued Genesis and parent company Digital Currency Group for falling short on obligations to lend to and hedge risk for Earn.

Regulators brought civil and criminal actions against the crypto lenders in connection to revelations uncovered from the insolvencies. Bankruptcy proceedings found that Genesis Global, BlockFi, Celsius, and Voyager Digital issued cryptocurrency loans without sufficient collateral to FTX and affiliated trading firm Alameda Research and operated at unsustainable deficits while representing to investors that their financials were intact.

The SEC sued Genesis and Gemini for selling unregistered securities through the Earn product. Celsius faced SEC and CFTC actions for making misleading statements about its financial stability. The Federal Trade Commission (FTC) banned Voyager Digital from offering and marketing yield-generating crypto products. The New York Attorney General (NYAG) sued Celsius' former CEO Alex Mashinsky, Gemini, and Genesis for understating their lending products' risk to investors.

FTX could take on a second form or a copycat. FTX's bankruptcy estate is mulling a sale to parties interested in relaunching the exchange with different management. FTX's former lawyer is planning to start up an FTX-like exchange that lets customers validate reserves on demand.

The Bottom Line

FTX was a global cryptocurrency exchange that facilitated spot, derivatives, and leveraged trading for commonly traded cryptocurrencies and NFT collectibles until it went bankrupt and its executives were convicted.