The cryptocurrency exchange FTX declared bankruptcy and its CEO, Sam Bankman-Fried, resigned, shocking crypto insiders and sending shockwaves throughout the industry.

The demise came on the heels of FTX’s rival, Binance, pulling out of a deal to acquire the company.

After Binance, the world’s largest cryptocurrency exchange, backed out of a deal to save the company, things went downhill for FTX.

According to a person familiar with the matter, US prosecutors are investigating how funds held by the exchange operator moved outside the US as it was hurtling toward bankruptcy, laying the groundwork for a potential fraud case against Sam Bankman-Fried and others involved in the collapse of cryptocurrency giant FTX.

Prosecutors are looking into whether hundreds of millions of dollars were improperly transferred to the Bahamas around the time of FTX’s bankruptcy filing in Delaware on Nov. 11, the person said, declining to be identified because the case has not been made public.

What Is FTX? Who is SBF?

FTX is one of the world’s largest cryptocurrency exchanges. Customers can exchange digital currencies for other digital currencies or traditional money, and vice versa. Mr. Bankman-Fried ran it from the Bahamas. It has spent millions of dollars lobbying US lawmakers to enact crypto-friendly legislation.

The company’s business model was based on risky trading options that are not legal in the United States. The cryptocurrency industry as a whole has become increasingly the focus of regulatory scrutiny on Capitol Hill and around the world.

Bankman-Fried, who is currently in the Bahamas and has not been charged with any crimes, admitted to grave managerial mistakes at FTX but has consistently denied knowingly misusing customers’ funds.

Bankman-Fried has given a series of media interviews in the last month, describing accounting errors that obscured the extent of FTX’s ties with Alameda and the risks that resulted. On Friday, he stated on Twitter that he is willing to testify about the disintegration of his crypto empire at a hearing before the US House Financial Services Committee on December 13th.

In a bankruptcy filing, FTX’s new CEO, John Jay Ray III, said he had never seen “such a complete failure of corporate control.” Mr. Ray had assisted in the management of the aftermath of some of history’s largest corporate failures, including Enron’s implosion in 2001.

Mr. Ray, the new FTX CEO, filed for bankruptcy on Thursday, detailing numerous corporate blunders, including the use of software to “conceal the misuse of customer funds.” Mr. Ray also stated in the filing that he did not have confidence in the financial statements compiled under Mr. Bankman-leadership. Fried’s

Hundreds of thousands of customers who deposited funds on the FTX platform have had their savings jeopardised. Mr. Ray’s team has so far secured approximately $740 million in cryptocurrency belonging to parts of FTX’s business, a sum he describes as “only a fraction” of what he hopes to recover.

What is Silvergate?

Silvergate was an unlikely choice to be the bank behind the $40 billion cryptocurrency exchange that went bankrupt last month.

It was a tiny community lender focused on financing small real estate deals for the majority of its 30-year history, with three branches in southern California and less than $1 billion in assets.

However, by 2019, it had quickly grown to become the largest cryptocurrency bank in the United States, with 1,600 of the world’s top crypto miners, exchanges, and custodians using it to deposit and transfer billions of dollars each month.

Deposits increased from about $2 billion in 2020 to more than $10 billion in 2021. By this year, total assets had risen to $16 billion. Silvergate’s share price had risen to more than $200 in less than ten months after it debuted on the New York Stock Exchange at the end of 2019 at $12 per share.

A letter from US senators to the head of the bank, Alan Lane, says that Silvergate “appears to be at the center” of how those funds were moved around Bankman-crypto Fried’s empire. It said that if Silvergate didn’t find such a “scheme,” it could have broken laws against money laundering.

Silvergate has quietly taken down the nice words from Bankman-Fried and all other references to its former client from its website. The collapse of FTX wiped out two of the bank’s most important clients. About 10% of Silvergate’s total assets belonged to FTX, and BlockFi, a major crypto lender, was also a customer of FTX. In its bankruptcy filings, FTX said that it and its “related entities” had about 20 different accounts at Silvergate.

Over the next six years, Lane and Reynolds sold Silvergate’s business banking team and cut back on its real estate group. In 2016, it had about 20 crypto clients, like Xapo, Paxos, and Bitfury. Now, it has more than 1,000 crypto clients, and its management is looking into riskier ways to improve its balance sheet, like launching a stablecoin and setting up loans against cryptocurrencies.

Silvergate broke up with Binance, the biggest cryptocurrency exchange in the world, in June 2021 for unknown reasons.

What’s a “Lehman moment”?

For a long time, the cryptocurrency industry has struggled to persuade regulators, investors, and ordinary customers that it is trustworthy. The collapse triggered investigations by the Justice Department and the Securities and Exchange Commission into whether FTX improperly used customer funds to support Alameda Research, a trading firm founded by Mr. Bankman-Fried.

“Lehman’s moment,” referring to 2008’s Lehman Brothers collapse. This analogy lasted four weeks. Janet Yellen, U.S. Treasury Secretary, used it last week.

It’s a Lehman moment for crypto, and investors have been hurt. There are also business parallels. Both Bernie Madoff and FTX founder Sam Bankman-Fried showed a talent for “charming regulators and investors” and distracting them “from delving in and discovering what’s actually going on

Former FDIC chair Sheila Bair told CNN.

Others compared FTX’s collapse to Enron’s 2001 meltdown.

“The room’s smartest. Reports indicate financial mistake and fraud. Early firm stadium namings. Nobody knows where the wealth is coming from.

Former U.S. Treasury Secretary Lawrence Summers

Patrick Hillman, Binance’s chief strategist, compared Bankman-Fried to “delusional” Theranos founder Elizabeth Holmes.

What’s a “Lehman moment”? A quick financial collapse? Or does it mean a bankruptcy that shakes an industry or the global economy?

“Lehman was the moment everyone realized the seriousness of the Global Financial Crisis,” says Wharton professor Kevin Werbach. A Wall Street pillar disappeared overnight, which was shocking. It prompted regulatory action. Lehman’s bankruptcy revealed a weakness in financial risk management, leading to Dodd-Frank.

Lehman seems a bit extreme. The investment bank’s failure affected the global economy, not simply a subsector. Scale matters. FTX may have cost investors $10 billion to $50 billion. According to the GAO, Lehman became a symbol of the subprime mortgage catastrophe. FTX’s fall may affect crypto, but it won’t bring down the financial system. In this way, it seems more like Enron/Theranos/Madoff than Lehman

Hanna Halaburda of NYU’s Stern School of Business.

This Lehman analogy may not work, though. What if the FTX case involves fraud, not insufficient or ineffective regulation like Lehman Brothers? If true, it may resemble Enron’s 2001 bankruptcy, the largest in U.S. history. Both FTX and Enron’s leaders knew they were breaking the law, yet they did it nonetheless.

Bankman-Fried used FTX client custody accounts to sustain his linked business, Alameda Research, almost like a piggy bank.

Then there is Theranos. “In some ways, Bankman-Fried is like Elizabeth Holmes. She was a “wunderkind” who said she was doing good, but it looks like she tricked a lot of investors. But was he a crook from the beginning?” asked Timothy Massad