Can you spend money that is not yours? Yes, you can. As long as you pay them whenever the other party demands. Confused?
We are too! This has been happening all the while in FTX which was the second-largest crypto exchange platform. It is alleged that Sam Bankman Fried has been using $10 billion of customer funds for his own trading. Not all customers will demand their money on the same day. So, FTX kept a few billion dollars to pay the customers who will want their money back.
Was it so easy? And, how did this scam got caught? Let’s find out.
Launch of FTX Tokens
The story began with the launch of FTX Tokens aka FTX’s own cryptocurrency. Though many of you think of crypto trading as just entries in an electronic ledger, it derives value from its ‘use case’. So, FTX tokens should have some use. Customers who held FTX tokens got discounts on transaction costs and withdrawal fees. This started increasing the price of FTX tokens. To further spike the price, FTX reduced the supply of these tokens.
Fake Asset Created! Take Loan!
Now, FTX has an asset whose value is inflating day by day. It could still wait for the price rise but what if you want all that future money today? You take a loan against that asset. There’s nothing wrong with this but that asset has to be yours. This is where the real problem is. Sam Bankman Fried (SBF) has two companies: FTX and Alameda Research. Before the price of FTX tokens was inflated artificially, Alameda Research bought these tokens at a lower price.
Now, this is worth billions. It took a loan against it. And, apart from these tokens, there were not any other significant assets on its Balance Sheet. In fact, it was bleeding in trading losses. To save it from losses, SBF also transferred the customer's funds to Alameda Research.
Can you transfer something you don’t own?
The beauty of an exchange trading platform is that it has customer deposits. The cash settlement of transactions generally takes a few days to happen after placing the order. So, exchanges have customer deposits that they have either kept for buying cryptos or the sale value which is yet to reach the customer’s account. Technically, this is not FTX’s money.
But, it is alleged that Sam Bankman Fried has transferred around $10 billion of customer funds to Alameda Research to stop the bleeding of funds. Because not all customer deposits will be withdrawn together. It just had to be kept secret from the public.
Big News Leak!
CoinDesk got a whiff of this and published an article. That’s when all customers came to look for their deposits and started selling FTX tokens. Now, FTX is out of money to pay customers. Customer withdrawals stopped getting processed. This is where Binance came as a guardian angel. It said it would buy FTX and return money to customers. But, that went up in smoke the very next day. Binance withdrew its offer saying “issues are beyond our control or ability to help”. This even made things worse for FTX.
Current Status