FTX, one of the largest crypto exchanges on the market, is going through a messy collapse that involves frozen assets, missing funds, possible financial fraud and even exposure of user data. While some say this is yet another massive hit to the cryptocurrency industry, especially after the recent fall of crypto lender Celsius, the FTX fiasco is yet another proof that non-custodial crypto wallets are a very bad idea.
FTX has filed for Chapter 11 bankruptcy proceedings and froze all of its assets after users withdrew roughly $6 billion within 3 days. Founder Sam Bankman-Fried has also stepped down from his executive position. The company attempted to make an investment deal with Binance to prevent the collapse, but it failed to reach a conclusion. FTX and its FTT token face a grim future.
But, what does bankruptcy filing mean for the exchange’s customers and creditors? And how will it impact crypto traders and cybersecurity?
The Sudden Fall of FTX
FTX was founded in 2019 and quickly expanded to become one of the biggest cryptocurrency exchanges with more than one million users. The company was worth $32 billion just a couple of months before filing for bankruptcy…. So what happened?
It turns out, FTX’s downfall was brought about by the way it used its own native token – FTT.
FTX supports many of its projects with FTT, just like other exchanges like Binance. There’s nothing unusual there. But according to CoinDesk, it turns out that FTX’s sister company Alameda Research, also co-founded by Sam Bankman-Fried, was used as a lender and most of its assets were in FTT holdings. This made for a shaky foundation as Alameda was left vulnerable to the volatility of the token and its solvency came into question.
The CoinDesk story convinced Binance, a major FTT holder, to sell off all of its FTT… which it ignited a chain reaction. As more investors sold their holdings, FTX offered to sell a part of the business to Binance in exchange for rescue. Binance agreed to a bail-out, but just a day later withdrew the offer. This is what Changpeng Zhao, the CEO of Binance, had to say about the event:
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com.
In a short span of several days, FTX went from a major leader in the crypto industry to a bankrupt company. On November 11th, FTX announced on Twitter that it filed for bankruptcy proceedings together with Alameda Research and 130 other related companies.
Vanishing Customer Funds on FTX
According to Reuters, Sam Bankman-Fried transferred from FTX $10 billion worth of funds to his other company, Alameda Research. Now, between 1$ billion and $2 billion from those funds are unaccounted for. The two sources who revealed the information to Reuters “held senior FTX positions until this week” and “they were briefed on the company’s finances by top staff.”
The sources explained that Bankman-Fried held a meeting to inform his executives about the $10 billion transfer of customer funds from FTX to Alameda. He showed his legal and finance teams the spreadsheets with the financial data, but there was a gap of over $1 billion that couldn’t be accounted for.
Bankman-Fried then wrote on Twitter:
We didn’t secretly transfer. We had confusing internal labeling and misread it.
FTX’s teams discovered that Bankman-Fried used a backdoor in the company’s accounting system to change the financial records without triggering any alarms and internal procedures. However, the SBF denied the existence of this backdoor when Reuters contacted him for a reply to the accusation.
Reuters’ sources also said that the U.S. Securities and Exchange Commission, the Department of Justice, and the Commodity Futures Trading Commission are now investigating the transfer of customer funds.
The Possibility of FTX Customer Data Exposure
Since FTX and Alameda Research filed for Chapter 11 bankruptcy restructuring proceedings, the companies are forced by the U.S. bankruptcy code to reveal all information about their assets. And it has to be public. Why is this important?
The problem with crypto exchanges that also work as lenders is that they might use the assets from their customers’ accounts. This means that all data about those customer assets have to be made available to the public. Celsius Network faced the same problem and they were forced by the court to release private information about its customers and their transactions.
The same thing is likely to happen with FTX, Alameda, and all other companies that filed for bankruptcy proceedings as part of this fiasco. This puts the privacy of over a million FTX customers at risk because anyone will be able to access the data.
What Can FTX Customers Do to Protect Themselves?
If you’re an FTX client, your assets are frozen and you can’t withdraw them at the time of writing. There’s not much you can do about the situation until the bankruptcy proceedings are finished and the next steps follow.
That said, there are some steps you can take to prevent future losses and protect your digital identity in case your private data is published. Here’s what you can do:
- Store your cryptocurrency in a decentralized custodial wallet or a hardware wallet. If you don’t own the keys to the wallet, the crypto isn’t really yours and you’re at the mercy of the exchange. I cannot overstate this.
- Crypto assets are high-risk investments. Research the companies behind lenders, exchanges, and tokens thoroughly. Consumer protections are quite limited in this industry.
- Use CyberGhost VPN to encrypt your data and hide your digital identity from cybercriminals. We protect your connection on up to 7 devices simultaneously so doxxers can’t trace you.
- Change all your profiles, usernames, and passwords. Don’t use the worst passwords that anyone can guess. Treat your current data as exposed even if FTX didn’t release it yet.
Treat your crypto the same way you would treat gold. Keep the keys to the lock, bury it in a secure location, and hide any trace of it. If you do want to use your crypto on an exchange, make sure you do so from a custodial wallet to prevent your funds from being used by someone else.