The collapse of the FTX exchange: The end of cryptocurrency's age of innocence

Abstract

The sudden collapse of the FTX exchange appears to have unearthed several fundamental ethical, regulatory, and policy-based flaws, inherently damaging the cryptocurrency industry at large. The following research outlines the key events that led to the bankruptcy of FTX while examining industry-wide implications as a consequence of an acute risk management failure. Results indicate severe risk and liquidity imbalances between the assets and liabilities of FTX, which contributed to the collapse of the exchange and subsequently led to contagion effects across a range of financial market products. The insolvency of FTX should serve as a significant warning to policymakers and regulators, specifically surrounding the valuation, reserving, and corporate usage of permissionless, privately-issued cryptocurrencies.