The Impact, Consequences and Potential Consequences of the implosion of FTX

Despite the crypto sectors reputation of volatility, the collapse of the crypto exchange FTX has shocked its own investors, the financial sector in general and most importantly its customers.

Initially Samuel Bankman-Fried’s crypto exchange based in the Bahamas soared following its foundation in 2019 and was valued in excess of $30 billion.  The rapid implosion of FTX created a run on the exchange by its agitated customers attempting to withdraw their funds. 

The rapid rise and equally rapid demise of FTX has again raised the question of the urgent need for a regulatory framework to govern crypto and aspects associated with crypto.  The FCA issued a cautious warning about FTX and there were discussions between the two organisations.

One of the domino effects of FTX’s collapse is the investor flight from cryptocurrencies caused Bitcoin to plunge nearly 25% yet again and then in a demonstration of crypto’s capriciousness it almost immediately rose 5%.  However, Cityam reports that one of the most prominent crypto brokers, Genesis, has frozen withdrawals due to the “abnormal withdrawals requests” that have compromised the firm’s liquidity.

Giambrone & Partners’ banking and financial fraud litigation department has warned of the unpredictability of the cryptocurrency market and the ease with which crypto fraudsters dupe unwary investors.  Our lawyers maintain a watching brief on the ever-changing tactics the crypto fraudsters employ to draw novice investors into their scams.

FTX was until recently one of the main trading platforms for cryptocurrency.  It appears that FTX, headed by Samuel Bankman-Fried, was managed extremely badly, with high-level corporate restructuring expert John Ray III commenting “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here”.

Joanna Bailey, head of the banking and financial litigation department, pointed out “FTX does not have an accounts department and there are no financial records or even list of who worked for the FTX Group or the terms of their employment.” Joanna further commented “it remains to be seen whether FTX was a deliberate large scale scam or simply an organisation run by inexperienced, unsophisticated an inept individuals. Either way, recovering money for FTX customers does not look as if it is going to be easy, even for the highly experienced John Ray III who presided over the collapse of Enron and other large organisations”

Giambrone & Partners’ lawyers have, in the past, drawn attention to the lack of regulatory governance in the cryptocurrency sector, driven in part by the desire to retain the power to manage financial transactions without a regulator watching over their shoulders.  However, this is highly unwise as it allows the largely invisible scammers free reign to hit and run with both invisibility and no accountability.

The deputy governor of the Bank of England,  Sir Jon Cunliffe expressed a belief that there is an urgent need for regulatory oversight of firms involved in the crypto market before this market expands to the extent that any similar crypto shocks could destabilise and threaten the wider financial markets. The Economic Secretary to the Treasury and the City Minister The City minister Andrew Griffith tabled an amendment to the Financial Services and Markets Bill currently progressing through Parliament allowing the financial regulators to develop a framework aimed at cryptocurrencies.

Demetri Bezaintes, an associate in the banking and financial litigation department, commented “there are some stark lessons to be learned by investors from the FTX collapse, some of whom regard cryptocurrency as a “get rich quick” vehicle and fail to truly consider the risks; they often choose to put their eggs in the most popular cryptocurrency basket without considering that diversity and spreading their investment risk is a safer course of action.” Demetri further pointed out “the abysmal record-keeping at FTX means that unless an investor retained records of their own, they may be in difficulty when attempting to claim back their money. It is of vital importance to retain records of all financial dealings”

Joanna Bailey frequently leads the litigation against financial institutions involved in cryptocurrency trading disputes, as well as Forex investment issues and regulatory investigations and has some considerable success in retrieving our clients' funds lost in fraud.

Joanna has developed a range of strategies both to find the assets of the individuals perpetrating the fraudulent schemes and restore the funds to our clients. As well as recognising culpability in the organisations facilitating (but not associated with the fraud), by failing to undertake adequate due diligence.

She is highly experienced in high-value out-of-court settlement negotiations and has in-depth knowledge of the Civil Procedure Rules as well as English common law.

Demetri Bezaintes has a thorough knowledge of investment fraud and fund tracing. He works tenaciously for our clients, advising on cryptocurrency, Forex trading disputes and regulatory investigations. He draws his expertise in investment law from his experience in the banking sector and his studies in banking and financial services regulation. Before joining Giambrone & Partners Demetri worked at an international bank, where his main focus was the enforcement of freezing orders and third-party debt orders.

He approaches cross-border jurisdiction matters with a comprehensive view, based on his knowledge of both civil and common law. 

Giambrone & Partners continues to monitor the FTX and cryptocurrency in general to provide the best advice to our clients that have suffered losses due to financial fraud.

If you believe that you have been the target of a financial fraud please contact Joanna's clerk Sam Groom on SG@giambronelaw.com or please click here