An Analysis of the Legal Implications of the FTX Cryptocurrency Collapse

By Tyler Ringhofer

Tyler is a freshman in the College from Orange County, CA studying Politics, Philosophy, and Economics. Tyler's interests include the relationship between business, law, and sports.
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"The future is cryptocurrency”— or is it? In November 2022, one of the biggest cryptocurrency exchange firms in the world, FTX Trading Ltd., went bankrupt. FTX is a cryptocurrency trading company that buys and sells crypto derivatives. This scandal, which became notorious in the digital currency world, increased public distrust in the cryptocurrency industry as a whole.[1] Thus, the ramifications of this event elicit several legal implications on the part of FTX’s CEO Sam Bankman-Fried including indictments on fraud and related crimes.
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It is worth noting that FTX was once valued at $40 billion, underscoring the immense power of the cryptocurrency industry and consequent implications of the scandal. FTX is available in multiple areas around the world such as the United States, Japan, and countries in Europe. In fact, FTX also consisted of Bitcoin trading, and was co-founded by Sam Bankman-Fried and Gary Wang in 2019. [2]
When business scandals like these occur, it often begs the question: why did a seemingly successful company suddenly see its ruin? The collapse of FTX can be attributed to a mismanagement of funds as well as the liquidation of assets of FTX by Bankman-Fried. Regarding liquidation, Bankman-Fried allegedly moved a total of $10 billion in assets to his trading firm Alameda Research Company, creating a lack of liquidity of the company token FTT. [2] Bankruptcy ensued in November 2022, which also led to Bankman Fried’s resignation as CEO of FTX. This event was fueled by immense panic amongst customers involved in FTX trading, including bitcoins, leading to a dramatic increase in customer withdrawals. [2]

In light of his actions, Bankman-Fried was arrested in December 2022. A class action lawsuit against FTX was filed by FTX investors in late 2022. This lawsuit was filed, not only against the former CEO, but against celebrities that have recently become intertwined with the company, including Tom Brady and Shaquille O’Neal. [3] Plaintiffs argued that these individuals were negligent in their actions by promoting the company without first undergoing requisite due diligence. [3]

The charges brought against Bankman-Fried in the lawsuit according to the Justice Department included conspiracy to commit money laundering, commodities fraud, false representation, and deceptive conduct, among others. During Bankman Fried’s trial in October 2023, Bankman-Fried testified in his defense, detailing that although his company collapsed, he had no intention of stealing billions of dollars from investors nor did he try to defraud anyone. The legal question of the trial is whether Bankman-Fried acted in “good faith,” meaning whether Bankman-Fried acted with good intentions for his company and his investors in the absence of fraudulent intentions. [4] 

Bankman-Fried previously made public statements asking a federal judge to dismiss all criminal charges pressed against him. While answering questions from his lawyer, Bankman-Fried admitted to being negligent in not creating a risk-management team. [5] Due to evidence beyond a reasonable doubt, the Manhattan federal court found Bankman-Fried guilty in early November 2023 of financial fraud and stealing from FTX investors. The decision found Bankman-Fried guilty on all seven counts. [6]

Overall, the collapse of FTX is a stark reminder of the legal and business implications of a rather new field in cryptocurrency. Although corruption in financial markets is nothing new, the initial shock to financial markets from the cryptocurrency crisis is still palpable. All individuals, regardless of whether they invest or hold cryptocurrencies, should care about the outcome of this lawsuit because cryptocurrency was beginning to become an emerging space of commerce and currency exchange in the United States. However, this lawsuit has brought upon tremendous hesitancy surrounding the cryptocurrency market in the fallout from the events that transpired, underscoring the need for continued monitoring of cryptocurrency businesses. 

Thus, I offer a few insights for individuals who are potentially interested in investing in the cryptocurrency market or currently do not know much about it. For one, the case study of FTX serves as a warning for future investments into the industry as it casts a doubt on its stability. Notably, cryptocurrency is not currently a completely recognized medium of exchange in the United States. A notable company that does allow purchases with bitcoin is Tesla Inc., but even then cryptocurrency is not considered “money” in many economics spheres. [7] As a result, cryptocurrency is not a very liquidable asset and carries many risks and instability.     

With this in mind, I do offer a potential remedy to preventing collapses like this in the future. I strongly believe that a comprehensive and transparent legal foundation is vital in regulating cryptocurrencies to address related private and financial laws. [8] This foundation can include corporations safeguarding the effects by providing greater assurance and securities in public investment, which should now be closely regulated by the Federal Reserve Board. Currently, cryptocurrencies are outside the jurisdiction of the Federal Reserve insofar as banks and firms do not hold cryptocurrency assets. [9]    

Assurance can come in the form of customers being compensated against credit risk by having firms be required to hold a specified amount of reserves in their deposits as well as a guaranteed return on interest rate proportional to a firm’s risk. The Federal Reserve would serve as a watchdog to survey potential red flags that may cause the demise of cryptocurrency and its savings, as a lack of a risk management team contributed to FTX’s downfall.

In the end, I believe that the outcome of the trial was justified in light of all the available pieces of information available. Those who are willing to invest in cryptocurrencies should be informed of all the risks that are associated with this industry. At the same time, new measures need to be implemented to ensure that a scandal like this does not happen again.
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 I believe that approaching cryptocurrency with caution as a speculative investment is the right way to approach this market. Outside of the traditional forms of investment in markets such as stocks and bonds, considering the high volatility and risks involved with cryptocurrency needs to be a priority before investing. The case of Sam Bankman-Fried is only the first domino to fall in the cryptocurrency market, helping economists gauge the current state of cryptocurrency. Is cryptocurrency headed in the wrong direction? Only time will tell.​


[1] Davis, Darreonna. “What Happened to FTX? The Crypto Exchange Fund’s Collapse Explained.” Forbes, February 20, 2024. https://www.forbes.com/sites/darreonnadavis/2023/06/02/what-happened-to-ftx-the-crypto-exchange-funds-collapse-explained/?sh=3f0a364d3cb7. 
[2] Hetler, Amanda. “FTX Scam Explained: Everything You Need to Know.” WhatIs, March 28, 2024. https://www.techtarget.com/whatis/feature/FTX-scam-explained-Everything-you-need-to-know#:~:text=FTX%20crashed%20due%20to%20mismanagement,of%20mishandled%20customer%20funds%20surfaced. 
[3] Redbord, Ari. “Tom Brady and Other A-Listers Sued for Fumbling FTX Endorsements.” Forbes, February 2, 2023. https://www.forbes.com/sites/ariredbord/2023/02/01/tom-brady-and-other-a-listers-fumble-ftx-endorsements-but-will-they-be-held-liable/?sh=4aa244547d8c. 
[4] Law School , Cornell. “Good Faith.” Legal Information Institute, January 2023. https://www.law.cornell.edu/wex/good_faith. 
[5] Godoy, Jody, and Luc Cohen. “Sam Bankman-Fried Admits ‘mistakes’ but Testifies He Did Not Defraud Anyone | Reuters.” Sam Bankman-Fried admits “mistakes” but testifies he did not defraud anyone, October 28, 2023. https://www.reuters.com/legal/sam-bankman-fried-jury-hear-ftx-founders-testimony-fraud-trial-2023-10-27/. 

[6] Godoy, Jody, and Luc Cohen. “Sam Bankman-Fried Convicted of Multi-Billion Dollar FTX Fraud | Reuters.” Sam Bankman-Fried convicted of multi-billion dollar FTX fraud, November 2023. https://www.reuters.com/legal/ftx-founder-sam-bankman-fried-thought-rules-did-not-apply-him-prosecutor-says-2023-11-02/. 
[7] Chawaga, Peter. “Elon Musk Said Tesla Would Resume Bitcoin Payments Now That It Has Crossed This Threshold - Thestreet Crypto: Bitcoin and Cryptocurrency News, Advice, Analysis and More.” TheStreet, September 14, 2023. https://www.thestreet.com/crypto/markets/elon-musk-said-tesla-to-resume-bitcoin-payments-after-crossing-this-threshold. 
[8] Adrian, Tobias, Dong He, Arif Ismail, and Marina Moretti. “Crypto Needs Comprehensive Policies to Protect Economies and Investors.” IMF, July 18, 2023. https://www.imf.org/en/Blogs/Articles/2023/07/18/crypto-needs-comprehensive-policies-to-protect-economies-and-investors. 
[9] Q.ai - Powering a Personal Wealth Movement. “Does the Federal Reserve Regulate Cryptocurrency?” Forbes, October 4, 2023. https://www.forbes.com/sites/qai/2022/09/26/does-the-federal-reserve-regulate-cryptocurrency/?sh=5a77950129ca. 
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