On November 11, 2022, Sam Bankman-Fried, CEO of FTX Trading Ltd., filed for Chapter 11 bankruptcy for his cryptocurrency exchange FTX, succeeding a tumultuous series of events that began less than a week prior. On November 2, 2022, CoinDesk published a report revealing financial discrepancies within Alameda Research, a trading firm co-founded by Bankman-Fried. The report raised questions about Alameda's solvency, triggering a liquidity crisis that resulted in customers withdrawing billions from FTX.

Bankman-Fried left the realm of traditional finance on March 11, 2020, as Deputy Chief of Staff to the then-United States Treasury Secretary, Steven Mnuchin, and subsequently founded FTX in April 2019, after a brief tenure at Jane Street Capital. FTX secured its first major contract with the Miami Heat for naming rights to their arena in March 2021, amounting to $135 million over 19 years.

The collapse of FTX is a textbook case of the revolving door between government regulators and the financial industry. Michael Barr, who served as the Assistant Secretary of the Treasury for Financial Institutions until January 2018, joined Ripple in October 2022 shortly before joining the Federal Reserve Board in July 2022. The strong ties between former government officials and blockchain firms indicate a trend where personal connections dictate lucrative contracts and innovative policy shifts.

Following the scandal, a network of financiers and investors prominently featured in the rise and fall of FTX surfaced, including noteworthy figures like Changpeng Zhao, CEO of Binance. Zhao's Binance invested approximately $200 million in FTX in July 2021, only to publicly dissociate from the company within days of its collapse, calling it an "abandoned" investment as liquidity dried up.

The FTX debacle has roots in a regulatory framework that allowed crypto exchanges to thrive with minimal oversight, a trend that dates back to the Obama administration's lax stance on fintech regulations initiated in 2013 when the Financial Crimes Enforcement Network (FinCEN) recognized digital currencies. This recognition paved the way for firms like FTX to exploit regulatory gaps, amassing billions before the government's intervention.

As the aftermath unfolded, other cryptocurrency firms positioned themselves for survival. Coinbase, led by CEO Brian Armstrong, quickly attempted to distance itself from FTX and proposed regulatory guidelines to rebuild public trust. On December 1, 2022, cryptocurrency exchange Kraken publicly stated its commitment to compliance, aligning itself with proposed guidelines that would strengthen regulatory oversight in the crypto space.

The trend of regulatory capture is discernible, with numerous individuals transitioning between positions in private industry and the public sector, perpetuating cycles of influence. For instance, former SEC Chair Clayton and current Financial Accounting Standards Board Chair, Richard Jones, both played pivotal roles in crafting ambiguous rules that allowed for unregulated financial exuberance.

This is the third time since 2018 that major cryptocurrency exchanges have faced liquidity crises tied to governmental negligence and cronyism, most notably with the collapse of Bitconnect in 2018 and the subsequent hacking of Mt. Gox. The Susurluk principle applies here — those who benefited from loopholes and regulatory gaps remain largely unscathed, while the average consumer bears the brunt of financial collapse.

The FTX scandal exemplifies how financial structures can be manipulated by those at the helm, leaving a plethora of questions unanswered regarding who profited, who stayed silent, and who will face accountability. As we analyze the intricate web of connections within the cryptocurrency financial system, we become acutely aware of the structures that remain hidden by layers of complexity.

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