COVER STORY: FTX collapse could eclipse Enron

The spectacular failure of the world's third-largest crypto exchange could turn out to be one of the top corporate collapses in history. As much as $50 billion in liabilities could be spread across 134 entities around the world according to the bankruptcy filing.

The outlook for the estimated one million creditors is grim. An initial analysis of a leaked company balance sheet by Greg Lim, company intelligence research director at The Block, a specialist Web3 information and analysis firm suggested they will be lucky to get five cents in the dollar back.

FTX's demise could eclipse Enron's collapse ($23B in liabilities) by comparison, though it pales when measured against the $619 billion collapse of Lehman Brothers in 2008.

However, just like collateralised debt obligations sank Lehman, and drove a chain reaction of failures through the traditional financial industry during the GFC, the crypto world is now calculating the potential downstream contamination.

A who's who of Silicon Valley's investment and industry luminaries backed the business including; Sequoia Capital, Thomas Bravo, Softbank, Blackrock, NEA, IVP, Iconiq Capital, Altimeter Capital Management, Third Point Ventures, Tiger Global, Mayfield, Insight Partners, Lightspeed Venture Partners, Ribbit Capital, and Temasek Holdings. 

Its accounts were audited by Armanino, and by Prager Metis a company that boasts that it was the first CPA firm to officially open in the Metaverse.

Last week the world's biggest exchange - Binance - said it would buy FTX and then promptly said it would not the next day after discovering irregularities. 

Shortly after that news, FTX experienced a significant hack with over $600M allegedly being drained from user accounts. 

FTX CEO Sam Bankman-Fried was forced to deny rumours that took hold on social media that he had fled in his private jet to Argentina. He was actually in the Bahamas where he has been interviewed by police and is apparently "under the supervision" of the authorities.

Regulator calls bullshit

The local authorities are particularly unimpressed with a statement by FTX which advised, “Per Bahamian HQ’s regulation and regulators, we have begun to facilitate the withdrawals of Bahamian funds. As such, you may have seen some withdrawals processed by FTX recently as we complied with the regulators”. 

In a statement, the Securities Commission of the Bahamas refuted the company's claims outright. "The Commission wishes to advise that it has not directed, authorised or suggested to FTX Digital Markets the prioritisation of withdrawals for Bahamian clients."

In particular, the Commission said that such transactions may be characterised as voidable preferences under the insolvency regime and could consequently result in clawing back funds from Bahamian customers. "In any event, the Commission does not condone the preferential treatment of any investor or client of FTX Digital Markets or otherwise."

The crypto-crowd on Twitter also leaned into wilder rumours, posting about a culture of amphetamine abuse at the company, software backdoors to facilitate illegal money transfers, and even the suspicious drowning of cryptocurrency pioneer Nikolai Mushegianin in Puerto Rico last month. 

All of it was supposition bordering on conspiracy theory, which of course brings us to Elon Musk. The Twitter CEO predictably waded into the only story in the business world that would possibly knock him off page one.

"I got a ton of people telling he’s got huge amounts of money that he wants to invest in the Twitter deal and I talked to him for about half an hour and I know my bullshit meter was redlining. It was like, this dude is bullshit – that was my impression." He made the comments in a Twitter Space he joined with over 60,000 listeners.

Bankman-Fried who has been featured on the covers of both Fortune and Forbes (a distinction he shares with Theranos founder Elizabeth Holmes) filed for bankruptcy for FTX on Friday. Already the damage is metastasising with reports that Alameda, a related company was lent as much as $10 billion by Bankman-Fried, something other executives including Alameda Research's Chief Executive Officer Caroline Ellison were aware of, according to media reports. Bitcoin Magazine is currently reporting that the CEO of  Alameda is in Hong Kong and trying to get to Dubai, a country that does not have an extradition treaty with the US, although this could not be verified.

For his part, Bankman-Fried seems to be finding solace in League of Legends, a massive multiplayer online game with which he is famously enthused according to the Financial Times, which also goes on the suggest he is not very good at it.

The Crypto-bros tracking his gameplay shared gaming analytics on Twitter indicating he spent four hours in League of Legends on Saturday, and when Digital Nation recently checked the same platform, the stats indicated he had been active 80 minutes earlier (this morning.)

By the weekend, US Treasury Secretary Janet Yellen was ringing the bell loudly for more aggressive regulation.

The crypto world has been down this road before. In 2014, the world's biggest bitcoin exchange Mt Gox famously imploded. The site, which at the time was handling almost 70 percent of global bitcoin transactions went belly up, with accusations of theft, and of the loss of bitcoins. Hundreds of millions of dollars were lost. Creditors claimed they were in the hole for $2.4 trillion. 

The trustee, Nobuaki Kobayashi, was still in possession of 142,000 bitcoins in the middle of this year. Those coins are worth more than $3.5 billion in today's value.