FTX’s collapse shows ‘new money’ cryptocurrencies still suffer from many of the same old problems

Mock vintage noir movie card featuring title 'Strange Case of the Missing Millions' in reference to collapsed crypto exchange FTX
(Image credit: Future / James Cutler)

The dramatic and still evolving collapse of cryptocurrency exchange FTX and founder (and now former CEO) Sam Bankman-Fried has sent shockwaves through the crypto communities. With allegations of misuse of customer funds and potential fraud — plus the unresolved issue of missing (possibly stolen) millions — the ongoing FTX saga raises troubling questions about crypto’s future.

To make sense of FTX’s collapse, it’s useful to understand how a cryptocurrency exchange like FTX works – or, rather, how one’s supposed to work. 

As the name suggests, exchanges facilitate the trading of cryptocurrencies. As a part of this service, crypto exchanges also offer functions vaguely similar to bank accounts, offering ‘digital wallets’ in which users can store their crypto assets. Like a bank account, users hold their crypto assets in these wallets until they are prepared to sell them on the always-fluctuating market, then purchase  more cryptocurrency or just take the ‘real money’ payout.

Crypto exchanges are thus frequently home to considerable sums of virtual money. That’s especially the case for popular exchanges like FTX, which was at one time the third largest crypto exchange by volume. But while they might primarily act as facilitators of the trading and storing of cryptocurrency worth millions, exchanges also hold the keys to digital wallet access. If an exchange such as FTX fails, or is the victim of a hack, users who are the technical owners of crypto assets largely have no recourse to recover their investments. 

Users own the tokens, but often sacrifice some degree of control to access these tokens, meaning cryptocurrency exchanges can be seen as holding underestimated amounts of power in crypto pipelines. FTX as such an exchange is no exception.

The recent troubles for FTX and its co-founder Bankman-Fried began within its own four walls, or rather those of Alameda Research, a financial trading firm also founded by FTX’s Bankman-Fried and run by his on-again off-again girlfriend Carolyn Ellison. In an article published to cryptocurrency news website CoinDesk on November 2, it was revealed that a majority of Alameda’s $14.6 billion in total assets came in the form of FTT cryptocurrency tokens.

With FTT tokens being the native token issued by FTX, this revelation raised eyebrows given the two companies’ shared founder and FTX’s responsibility for essentially overseeing and determining the value of the FTT token. A successful trading firm like Alameda Research being largely built on a foundation of a cryptocurrency token that it shares an owner with isn’t technically illegal, but raises prickly questions regardless. 

If the value of the FTT token were to rise, so too would the value and overall assets of Alameda Research, given this token’s role as the large part of its asset foundation. Naturally, this led many to wonder about what someone with stakes in both might possibly be willing to do to ensure FTT’s growth in worth, ultimately adding value in return to both Alameda Research and FTX. As a former FTX employee reportedly told Forbes, “He used money that doesn't exist to buy things. It’s just awful.”

At the hint of early trouble, the founder of leading cryptocurrency exchange Binance announced plans to liquidate its stock of FTT tokens, quickly igniting industry fears that the FTT token’s value would take a rapid dive as a result – and so it did. 

Things only got worse for FTX from there, with sources soon emerging with allegations that Bankman-Fried and FTX had been misusing customer funds for trading through Alameda Research. 

By November 11, both FTX and Alameda had declared bankruptcy and authorities in the US and Bahamas (home of FTX headquarters) had announced investigations into Bankman-Fried and his companies. 

Once worth billions of dollars, the one-time crypto wunderkind behind it all had seen his personal net worth plummet by 94% over the course of just a few days, and those of his companies fell apart entirely as it all unfolded. Yet his problems were far from over. So emerged the mystery of a missing $477 million.

The FTX crypto ‘heist’

In a post published on November 12, cryptocurrency analytics outfit Elliptic reported observing more than $663 million in cryptocurrency being removed from wallets on the FTX exchange, with approximately $477 million of this suspected to have been stolen. 

Subsequently, an FTX Admin took to the exchange’s Telegram social channel to report that the exchange had been “hacked”. This claim appeared to later be further confirmed through a tweet from FTX’s US General Counsel, in which he stated that he and the exchange were “investigating abnormalities”.

Naturally, given the timing, many onlookers and impacted FTX users alike have been quick to suggest FTX or Bankman-Fried himself as being the likely culprits behind the missing sum — or at least some kind of FTX insider.

Regardless of who the culprit responsible for the theft might be, what’s clear is that $477 million has gone missing, and it is hardly the first time such a heist has struck the crypto community and walked away with such a sum.

A path of cybercrime

Mock film poster for 'The Heist' featuring images of recently hacked crypto orgs

(Image credit: Future / James Cutler)

Hacks and heists are not a new phenomenon to cryptocurrency, with incidents having occurred within the industry at various times in the short years since digital currencies first emerged. Even so, incidents of cryptocurrency theft have nonetheless significantly increased in 2022 compared to previous years.

In March, for example, popular blockchain game Axie Infinity announced it had fallen prey to such a heist. This incident saw alleged cybercriminals compromising the Ronin blockchain on which the Axie Infinity game is built in order to access the crypto held within. This exploit is understood to have originated from a phishing scam targeting one of the game’s developers, using the ruse of a fake job offer to install spyware on the developer’s computer to gain access to the blockchain beneath the game. This heist, subsequently blamed on North Korea-backed hacker group Lazarus, allegedly saw the culprits walk away with as much as $615 million in cryptocurrencies USDC and Ethereum.

One month later, cryptocurrency company Beanstalk also found itself in the crosshairs of a heist, with cybercriminals exploiting a flaw in the crypto company’s system to drain as much as $185 million from its coffers. High-profile cryptocurrency exchange Crypto.com also announced that it was likewise the victim of a criminal crypto caper in 2022. The exchange – which most infamously owns naming rights to the Los Angeles sports arena that’s home to NBA teams the Los Angeles Lakers and Los Angeles Clippers (as well as the Grammy Awards) – admitted in January to having lost $35 million to a hack.

An attack on the leading cryptocurrency exchange followed, as Binance confirmed in October that an attack on the company’s blockchain had managed to steal away more than $500 million. In its statement confirming the attack, Binance apologized to its users, while also shedding light on a native issue to cryptocurrency making minimising harm from cyber incidents more challenging.

“Decentralized chains are not designed to be stopped, but by contacting community validators one by one, we were able to stop the incident from spreading,” the statement read. “This delayed closure, but we were able to minimize the loss.”

To comprehensively list all of the cryptocurrency companies or assets to have suffered significant losses to cybercrime in 2022 would be a tiring task, with the total industry damages as a result of digital heists considered to number as high as $3.55 billion from approximately 157 separate incidents – already higher this year than in any previous year.

Where to now for crypto?

Unsurprisingly, the allegations and revelations now swirling around FTX and founder Sam Bankman-Fried have seen renewed calls for greater regulation of cryptocurrency and crypto trading. 

Even Binance CEO Changpeng Zhao joined the chorus, saying at an event in Bali earlier this week, “We do need some regulations, we do need to do this properly, we do need to do this in a stable way.”

But Zhao also acknowledges the ways in which the risks of harm plaguing cryptocurrency can’t be mitigated by regulation alone. 

“I think the industry collectively has a role to protect consumers, to protect everybody, so it’s not just regulators,” Zhao said. “If somebody wants to violate the law, the law is not going to prevent that, the law can [only] reduce that.”

“As industry players we should be more vocal about it, we should set very strong standards for the industry.”

Ultimately, what the sum of the issues suffered by the cryptocurrency industry in 2022 shows is that crypto might be a new concept with alluring potential, but suffers from old problems regardless.

James Cutler
Staff Writer

James is a senior journalist with the TechRadar Australia team, covering news, analysis and reviews in the worlds of tech and the web with a particular focus on smartphones, TVs and home entertainment, AR/VR, gaming and digital behaviour trends. He has worked for over six years in broadcast, digital and print journalism in Australia and also spent time as a nationally recognised academic specialising in social and digital behaviour trends. In his spare time, he can typically be found bouncing between one of a number of gaming platforms or watching anything horror.