FTX 2022: The $32 Billion House of Cards

Situation

It is November 7, 2022. FTX, the world's second-largest cryptocurrency exchange, is valued at approximately $32 billion following a January 2022 Series C. Its founder Sam Bankman-Fried — "SBF" — is the most prominent figure in crypto: a political donor to both parties, an advisor to congressional crypto legislation, and the public face of "effective altruism." FTX has offices in the Bahamas and Miami's Brickell City Centre. Sequoia, SoftBank, BlackRock, Singapore's Temasek, and the Ontario Teachers' Pension Plan are investors.

Yesterday, CoinDesk published a leaked Alameda Research balance sheet. The document revealed that Alameda — FTX's affiliated trading firm, also owned by SBF — held $5.8 billion of its $14.6 billion in assets in FTT, the token issued by FTX itself. The circular dependency was stark: Alameda's largest asset was a token whose value depended entirely on FTX's continued success — and FTX's affiliate created both sides of that relationship.

This morning, CZ announced that Binance would sell its entire FTT position (~$584 million). He cited "risk management" and referenced "mishandled customer funds" — language that immediately triggered panic.

FTX has $900 million in liquid assets against $9 billion in liabilities — a mismatch that will emerge only when the bank run begins.

The decision moment

You are a senior analyst at a major venture firm that invested $400 million across two rounds into FTX. It is November 8, 2022 — 24 hours after CoinDesk's article and 12 hours after CZ's announcement. FTX's FTT token is down 72%.

SBF has tweeted: "FTX is fine. Assets are fine." He called claims about misuse of customer funds "false." Binance announced it would acquire FTX but is conducting due diligence.

Three questions confront you:

1. The circular collateral problem. Alameda's balance sheet showed FTT as its largest single asset. FTX issued FTT. Alameda is FTX's sister company under common ownership. If FTX is using customer deposits to fund Alameda's leveraged trading book — which is itself collateralized by FTT — what does a 30% decline in FTT do to Alameda's ability to repay? What does a 70% decline do? What does a 90% decline do?

2. The governance structure signal. FTX had no board of directors. Its Bahamian holding company was controlled by SBF with "significant" discretion over disbursements. Employees lived together in a shared house. The company had no CFO, no conventional accounting, and QuickBooks as its primary financial system. Political donations were logged informally. SBF described major decisions as conversations with his "inner circle." How do you assess governance quality when a company's investors — including institutional pension funds — accepted these conditions?

3. The CoinDesk leak as signal. The leaked Alameda balance sheet was not disputed by SBF or Alameda. The document appeared to originate from Alameda's internal systems. If the information was accurate, it implied that Alameda's apparent solvency was entirely dependent on the FTT price — which Alameda itself held in vast quantities. At what point does an undisclosed balance sheet dependency constitute fraud versus aggressive (if imprudent) financial engineering?

Key financial datapoints

The fraud mechanics

FTX's fraud was operational rather than accounting: customer deposits were treated as proprietary funds.

When users deposited dollars or crypto to trade on FTX, those assets were supposed to be held in segregated custody. Instead, FTX's codebase contained a special exception — written by Nishad Singh — that gave Alameda Research an effectively unlimited "line of credit" from FTX's customer asset pool. Alameda could withdraw any amount without triggering the margin call system that applied to other users.

By November 2022, Alameda had borrowed approximately $8 billion in customer funds to fund leveraged trading positions. The positions went wrong during the 2022 crypto bear market. By the time of the bank run:

1. Collateral was reflexive: Alameda's loans to FTX were backed by FTT. FTT's value collapsed when FTX collapsed — meaning collateral evaporated simultaneously with the margin call.
2. No board existed to detect or stop the withdrawals: SBF controlled the holding company; there was no governance mechanism to challenge transfers.
3. Auditors (Armanino and Prager Metis) signed off on crypto-native "proof-of-reserves" that did not capture off-platform liabilities. Mainstream audit standards were not applied.
4. Political access reduced regulatory scrutiny: SBF was the second-largest individual Democratic donor in the 2022 cycle; he cultivated CFTC and SEC relationships simultaneously.

Frameworks invoked

• Principal-Agent Problem. FTX customers were principals who trusted FTX to hold their assets in segregated accounts. SBF was the agent. The conflict: SBF also controlled Alameda, creating an incentive to divert customer assets to fund proprietary trading. Without independent governance (no board, no CFO, no audit committee), there was no mechanism to enforce the principal's interest.
• Circular Collateral / Reflexivity. When an exchange issues its own token, uses it as collateral for its affiliated trading firm's loans, and that trading firm holds the token as its primary asset — any decline in the token price is simultaneously a decline in collateral value, a trigger for margin calls, and a signal of exchange distress. George Soros termed this "reflexivity": price changes validate the narrative that caused them.
• Governance Theater. SBF assembled an advisory board of luminaries, made large political donations, testified before Congress, and publicly advocated for crypto regulation — all of which created an appearance of legitimacy that delayed scrutiny. Governance theater is most dangerous when regulators and investors accept symbols of governance (famous names, public statements) in lieu of actual governance mechanisms (independent boards, audited financials, segregated custody).
• Earnings Quality / Cash vs. Accrual. FTX reported strong revenue from trading fees. The actual economic picture — a $9 billion liability owed to customers whose funds had been lent to Alameda — was invisible in any public document. Always ask: does reported revenue correspond to actual cash flows that do not require future customer confidence to be realized?

Discussion questions

1. CZ's announcement that Binance would sell its FTT position was the trigger for FTX's collapse. SBF later called it a "targeted attack." Was CZ's action an act of market manipulation, legitimate risk management, or competitive strategy — and does the distinction matter for policy purposes?
2. FTX's investors — Sequoia, SoftBank, Temasek, Ontario Teachers' Pension Plan — conducted due diligence before investing. SBF kept no conventional financial records. QuickBooks managed billions in assets. No board existed. What does it tell you about due diligence practices in the 2021–2022 venture bull market that these conditions were accepted?
3. The FTT token was issued by FTX, held in large quantities by Alameda (FTX's sister firm), used as collateral for Alameda's loans from FTX, and reported as an asset on Alameda's balance sheet. Draw the full circular dependency. At what stage in the FTT lifecycle does the structure become fraudulent — or was it fraudulent from inception?
4. SBF testified before Congress and publicly advocated for crypto regulation while simultaneously running an operation that would have been illegal under almost any regulatory framework. How should regulators weight the public advocacy behavior of firms seeking regulatory legitimacy?
5. John J. Ray III — who oversaw Enron's bankruptcy — said FTX was the worst corporate governance failure he had ever seen. The Enron comparison is common. In what specific ways is FTX structurally different from Enron — and where does the analogy hold?

The real outcome (revealed at session end)

November 8, 2022: Binance signs non-binding letter of intent to acquire FTX. Due diligence takes hours; Binance walks away after reviewing the $8 billion customer fund shortfall.

November 11, 2022: FTX files Chapter 11 bankruptcy. John J. Ray III appointed CEO. SBF resigns.

December 12, 2022: SBF arrested in the Bahamas on criminal charges filed by the SDNY. He is extradited and pled not guilty.

2023: Caroline Ellison, Gary Wang, and Nishad Singh plead guilty and cooperate with prosecutors. Evidence reveals Alameda received $8 billion in customer funds and used much of it on venture investments, political donations, and real estate — in addition to trading losses.

November 2023: SBF convicted on all 7 counts (the eighth was dropped) after a 5-week trial in Manhattan federal court.

March 2024: SBF sentenced to 25 years imprisonment.

The lesson: The absence of governance is not a startup quirk — it is a structural fraud enabler. When exchange and trading firm share the same owner, when customer funds are stored in the same systems as proprietary funds, when no independent board exists to question transfers, and when the primary collateral for inter-company loans is a self-issued token — every element of the structure is designed to allow fraud, whether intentionally or not.

Sources

• MIT Sloan School of Management, "FTX: The Collapse" case study (2023). Creative Commons licensed.
• DOJ Criminal Indictment: United States v. Samuel Bankman-Fried (SDNY, December 2022).
• CoinDesk, "Divisions in Sam Town" — the Alameda balance sheet leak (November 2, 2022).
• John J. Ray III testimony before the House Financial Services Committee (December 13, 2022).
• SBF trial transcript, SDNY (October–November 2023).
• FTX Chapter 11 bankruptcy filings, Delaware (November 2022 onward).