Multi-billion dollar FTX fraud

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What’s in today’s article?

  • What’s in today’s article?
  • Why in news?
  • What is Cryptocurrency?
  • Growth of crypto ecosystem presents new opportunities
  • What are challenges posed by crypto assets?
  • Use of cryptocurrencies in India: Statistics
  • Crypto regulation in India
  • What is FTX scandal?
  • What is FTX?
  • Why did FTX run into trouble?
  • Impact of FTX scandal on cryptocurrency market

Why in news?

  • FTX founder Sam Bankman-Fried was found guilty of stealing from customers of his now-bankrupt cryptocurrency exchange in one of the biggest financial frauds on record.
  • The prosecutors made the case that he looted $8 billion from the exchange’s users out of sheer greed.


  • Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds.
  • These currencies operate independently of a central bank.

Growth of crypto ecosystem presents new opportunities

  • Technological innovation is ushering in a new era that makes payments and other financial services cheaper, faster, more accessible.
    • It allows these services to flow across borders swiftly.
  • Bank deposits can be transformed to stable coins that allow instant access to a vast array of financial products and allow instant currency conversion.
  • Decentralised finance could become a platform for more innovative, inclusive, and transparent financial services.

Challenges posed by crypto assets

  • The rapid growth and increasing adoption of crypto assets also pose financial stability challenges as these are extremely volatile.
    • These are much more volatile than equities or commodities or even exchange rates.This volatility is introducing instability in the ecosystem.
  • Challenges posed by the crypto ecosystem include
    • operational and financial integrity risks from crypto asset providers,
    • investor protection risks for crypto-assets,
    • inadequate reserves and disclosure for some stable coins.

Use of cryptocurrencies in India: Statistics

  • The number of blockchain start-ups surpassed 300 in 2021, with the daily crypto trading volume peaking between $300 -$500 million.
  • As per Global Consumer Survey in 2020, India ranks higher than China, United States, Germany and Japan in crypto adoption.

Crypto regulation in India

  • India’s stand in initial years of crypto
    • India’s stance on cryptocurrency has evolved.
    • In 2013, the RBI cautioned users, holders, and traders of virtual currencies, including cryptocurrencies, about the potential risks associated with their use.
    • In 2017, the RBI prohibited banks and other regulated entities from providing services to individuals or businesses dealing in cryptocurrencies.
      • The circular effectively made it illegal for Indian residents to buy or sell cryptocurrencies.
    • However, in March 2020, the Supreme Court of India overturned the RBI’s ban on cryptocurrencies.
    • Since then, the Indian government has considered a regulatory framework for cryptocurrencies.
  • Focus shifted from banning to regulating
    • In 2022, the Ministry of Finance released a report proposing the creation of a digital rupee, a state-backed digital currency, as well as a framework for regulating private cryptocurrencies.
    • The report also recommended the establishment of a Digital Currency Regulatory Authority (DCRA) to oversee the use of cryptocurrencies in India.
  • Tax on cryptos
    • In the 2022 Union budget, Finance Minister announced significant changes to the treatment of virtual assets, including cryptocurrency.
    • For the first time, the government officially classified digital assets, including cryptocurrency, as “virtual digital assets.”
    • In the proposed tax regime, the government has announced a flat 30-percent income tax on “crypto-assets”.
  • Leveraging the G20 for greater regulation
    • In February 2023, India announced that it is collaborating with the International Monetary Fund (IMF) and the Group of Twenty (G20) nations to create a regulatory framework for cryptocurrencies.
  • G20 Roadmap on Crypto Assets:
    • In October 2023, Finance ministers and central bank governors (FMCBG) from G20 nations adopted a roadmap for regulating crypto assets at their meeting at Marrakesh, Morocco.
    • The G20 Roadmap on Crypto Assets is a comprehensive strategy for addressing the challenges posed by cryptocurrencies.
    • It focuses on regulations rather than an outright ban to prevent crypto assets from destabilising the world economy.
    • It has been formulated with inputs from the International Monetary Fund (IMF) and the Financial Stability Board (FSB), both influential bodies in global finance.

FTX scandal

  • Recently, the cryptocurrency exchange FTX filed for bankruptcy and its chief executive, Sam Bankman-Fried, resigned.
  • As a result, the savings of hundreds of thousands of customers who deposited their holdings on the FTX platform are in jeopardy.

About FTX

  • FTX is a cryptocurrency exchange based in the Bahamas.
    • The company built its business on risky trading options that are not legal in the United States.
  • It was founded by Sam Bankman-Fried in 2019 and lets users buy, sell, hold, and trade cryptocurrency.
    • It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT.

Why did FTX run into trouble?

  • FTX has a native cryptocurrency token called FTT, which traders use for operations like paying transaction fees.
  • In November 2022, a report, based on leaked documents, appeared to show that Alameda Research held an unusually large amount of FTT tokens.
    • Alameda Research is a hedge fund run by Bankman-Fried.
    • FTX and Alameda are meant to be separate businesses, but the report claimed that they had close financial ties.
  • With this revelation, FTT’s price plummeted and traders rushed to pull out of FTX, fearful that it would be yet another fallen crypto company.
  • This resulted into liquidity crunch.

Impact on cryptocurrency market

  • The cryptocurrency industry has long struggled to convince regulators, investors and ordinary customers that it is trustworthy.
  • The fall of FTX, which seemed more stable than other companies, and the pull-out by Binance have jolted the market.
    • Binance is also a cryptocurrency exchange.

Q1) What is Binance?

Binance is a cryptocurrency exchange that allows users to buy, sell, and trade digital assets such as Bitcoin, Ethereum, and other altcoins. It was founded in 2017 by Changpeng Zhao, a developer who previously created high frequency trading software. Within 180 days, Binance became the largest digital asset exchange in the world by trading volume.

Q2) What is Financial Stability Board (FSB)?

The Financial Stability Board (FSB) is an international organization that monitors and makes recommendations about the global financial system. The FSB was established in 2009 at the G20 Pittsburgh Summit as a successor to the Financial Stability Forum (FSF).

Source: Ex-crypto mogul Sam Bankman-Fried convicted of multi-billion dollar FTX fraud | ORF | Forbes | Frontline