INSIGHTi

What Happened at FTX and What Does It
Mean for Crypto?
November 17, 2022
On Friday, November 11, FTX Trading Ltd. (FTX)—one of the world’s largest and most well-known
cryptocurrency exchanges—announced that it had “commenced voluntary proceedings under Chapter 11
of the United States Bankruptcy Code” in Delaware. Included in the proceedings were FTX US and
Alameda Research, a crypto trading company closely affiliated with FTX. The collapse of FTX is the
most recent and perhaps most consequential of a spate of crypto company failures this year. This Insight
examines the collapse and its implications.
What Is FTX and What Happened?
FTX was an international cryptocurrency platform that offered trading in both the spot market and
derivative contracts of cryptocurrencies and allowed customers to store their cryptocurrency holdings
with FTX. At its most recent valuation in fall 2022, it was believed to be worth about $32 billion—a
valuation that proved to be inaccurate.
According to one news report that had seen FTX investment materials from the day before the bankruptcy
announcement, the company held $900 million in “easily sellable assets” compared to $9 billion in
liabilities. According to the bankruptcy filing, it had over 100,000 creditors and between $10 billion and
$50 billion in liabilities.
Exactly what FTX did internally to cause its failure is unclear. However, the chain of events leading to the
public loss of confidence and bankruptcy began with a November 2 report by CoinDesk, which reported
that two of Alameda Research’s three largest assets (representing nearly 40% of its total assets) were the
FTX-related token FTT. (FTX issued FTT tokens to provide discounts on trading fees. FTT had been
worth $22 per token, fell precipitously throughout the FTX ordeal, and is currently trading at $1.65.)
Shortly thereafter, according to one report, FTX experienced $5 billion of withdrawals on November 6.
Around the same time, Changpeng Zhao, the CEO of rival exchange Binance, tweeted that his exchange
would sell its roughly $2.1 billion of FTT, essentially sparking a run on FTX. After FTX initially denied
solvency issues, FTX and Binance tweeted days later that Binance signed a non-binding letter of intent to
help FTX solve its “significant liquidity crunch.” By Thursday, November 10, the deal was off.
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For some, the vast quantity of FTT on the balance sheet of Alameda was suspect. Since CoinDesk’s initial
report, various media outlets have reported that an Alameda Research executive said FTX had transferred
customer funds to prop up Alameda. U.S. and Bahamian regulators are reportedly investigating FTX.
Another “Crypto Winter”
The cryptocurrency market has been characterized by periods of sharp price movements from its infancy.
After reaching a record high of more than $3 trillion total value in November 2021, the market
experienced a sharp and near constant downturn in which the collective cryptocurrency market
capitalization fell by nearly two-thirds. A host of cryptocurrency project and company failures in the
summer of 2022 were caused—and exacerbated—by this broader market downturn. This has been called
a “crypto winter.” Recently, crypto prices had been exhibiting a closer correlation with traditional
financial markets, especially tech stocks. However, the cryptocurrency market has fallen again since the
FTX collapse began.
Policy Options
Calls for greater regulation of the industry preceded FTX’s collapse. While it is unclear whether stricter
regulations may have prevented the situation at FTX, which is a Bahamas-based entity, anti-money
laundering (AML) statutes have been applied to companies in foreign jurisdictions when the proceeds of
illegal activity were included in banking transactions that cleared in the United States. U.S. regulations
may also apply if the company actively sought customers in the United States.
Regardless of jurisdiction, the events at FTX are relevant because they shine a light on practices by U.S.-
based exchanges that may be of interest to Congress. The first is whether these firms, which face fewer
regulations than traditional securities exchanges and operate as both exchanges and broker-dealers, face a
conflict of interest. Moreover, unlike traditional brokers, which must segregate customer funds, crypto
exchanges may have comingled funds, which could make it difficult for customers to recover funds if the
exchange were hacked or went bankrupt.
Currently, there is no comprehensive regulatory framework for cryptocurrencies or other digital assets.
Instead, various state and federal financial industry regulators apply existing frameworks and regulations
where exchanges or digital assets resemble traditional financial products. As such, regulators may treat
digital assets as securities, commodities, or currencies depending on the circumstances. For example,
cryptocurrency exchanges are licensed at the state level and register with the U.S. Treasury’s Financial
Crimes Enforcement Network as money transmitters for AML compliance. However, application of these
frameworks through formal or informal guidance by disparate regulators may make the environment
murkier in the event that various overlapping regulators make competing pronouncements. For example,
the chairs of both the Commodity Futures Trading Commission (CFTC) and Securities and Exchange
Commission (SEC) have alluded to the fact that some digital assets are commodities and others securities
under their respective jurisdictions. Where crypto actors are operating without registering with these
agencies, investors do not receive the protections that regulatory compliance provides.
Beyond the practical discussion of which regulatory frameworks are applicable, the FTX incident raises
more fundamental issues. Similar—albeit smaller—crypto failures in the summer of 2022 show how the
lack of an overarching regulatory framework can fail to stop bad actors and how less informed
participants may assume that crypto products have a regulatory “stamp of approval” when they do not.
Congress may choose to bring greater clarity and investor protection to the industry through legislation.
One option would be to establish procedures for digital asset exchanges to register with one of the large
market regulators and require that they segregate customer funds. On the jurisdiction issue, Congress may
choose to establish some rubric that distinguishes digital asset commodities from securities and create

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different procedures for registering the two types of digital assets. Where existing frameworks may be
insufficient, Congress may choose to expand the authority of the CFTC or SEC or encourage them to
engage in rulemaking using their existing authorities.


Author Information

Paul Tierno

Analyst in Financial Economics




Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
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as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
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