What is FTX
FTX was a cryptocurrency exchange, now bankrupt, that allowed users to buy, sell, and trade cryptocurrencies, including derivatives and leveraged tokens. It was founded in 2019 by Sam Bankman-Fried and Gary Wang, and its collapse in November 2022 stemmed from allegations of fraud and misuse of customer funds.
It provided a platform for users to trade in cryptocurrency like bitcoin, Ethereum etc.
The Collapse
FTX wasn’t just any cryptocurrency exchange—it was one of the largest, most public-facing, and most trusted platforms in the crypto space. Led by Sam Bankman-Fried (SBF), the company rapidly grew into a multibillion-dollar enterprise that garnered support from major institutional investors, celebrities, and even governments. Its image was one of compliance, innovation, and altruism.
The collapse of FTX in November 2022 sent shockwaves through the global financial ecosystem. Once considered a trusted and innovative crypto exchange, FTX’s implosion was a brutal reminder of what happens when rapid innovation outpaces regulation. With billions in customer funds lost, executives indicted, and investors left stunned, the downfall of FTX exposed glaring gaps in the legal and regulatory frameworks governing financial markets—especially in the digital asset space.
Regulatory Reactions: Closing the Gaps
Since the FTX collapse, governments and regulators have scrambled to respond:
The U.S. introduced legislation like the Digital Commodities Consumer Protection Act (DCCPA), aiming to grant the CFTC greater authority over crypto platforms. The EU passed the Markets in Crypto-Assets Regulation (MiCA), which sets out uniform rules for crypto firms operating in Europe. Countries like Japan and Singapore strengthened their reserve and reporting requirements for exchanges.
But many of these reforms are still in early stages, and critics argue they either go too far (stifling innovation) or not far enough (failing to prevent another FTX-type scenario).
Why is the bankruptcy and unravelling of FTX such a major event in the financial world?
FTX was one of the largest cryptocurrency exchanges in the world. Its founder and CEO, Sam Bankman-Fried, enjoyed celebrity status as the “paragon of crypto.” FTX operated through a network of over 130 affiliated entities, almost all of which have filed for bankruptcy – including Alameda Research, its trading arm. The bankruptcy petition reported that FTX may have more than 100,000 creditors and estimated its assets and liabilities were in the range of $10 billion to $50 billion.
The bankruptcy proceedings promise to be nightmarish, involving novel issues of law and multiple challenges to achieving an accurate accounting of the underlying facts. John J. Ray, the new FTX CEO (an experienced bankruptcy expert) has disclosed that the books and records of the FTX conglomerate are in disarray and unreliable. The Wall Street Journal has reported that FTX may have loaned billions of its customers’ deposits to Alameda. FTX has also reported that it has been hacked. And there is a significant jurisdictional dispute:
much of FTX’s operations were conducted in the Bahamas through FTX Digital Markets Ltd. The Securities Commission of the Bahamas has launched a liquidation proceeding to recover assets and deposits that may or may not be subject to the U.S. bankruptcy court. (Digital Markets is not part of the U.S. proceeding because the Bahamas had already put it in liquidation.)
How is it connected to Revenue Law
Under many national Revenue Acts, any entity conducting substantial business within a country (especially U.S. citizens and residents) is liable for income tax, capital gains tax, and reporting of foreign assets. However, crypto transactions—being pseudonymous, borderless, and often unregulated—enabled FTX to remain outside formal tax nets.
Many tax codes include sections equivalent to India’s Section 44AB (audit of accounts) or the U.S. IRC 6038 (disclosure of foreign entities), all of which rely on basic corporate governance and audit trails—which FTX ignored.
To prevent future FTX-style collapses, here’s what Revenue Acts across jurisdictions must urgently consider:
1. Crypto-Specific Tax Provisions: Just as securities law is adapting, Revenue Acts must define crypto assets and mandate clear taxation rules—on mining, trading, airdrops, and DeFi interest.
2. Blockchain Transparency Mandates: Tax laws should require exchanges and wallets to integrate traceable public addresses, making evasion more difficult.
3. Mandatory Crypto Asset Reporting (MCAR): Just like foreign bank accounts, crypto holdings above a threshold should be disclosed annually, backed by heavy penalties for concealment.
4. Exchange Registration for Tax Compliance: No exchange should operate without tax registration and quarterly filings showing trading volumes, profits, and user data (with privacy safeguards).
5. Intergovernmental Crypto Tax Treaty Framework: Much like DTAA (Double Tax Avoidance Agreements), countries must create treaties for cross-border crypto revenue sharing and audits.
How can a Law firm can provide you help in such situations
The dramatic downfall of FTX didn’t just expose regulatory loopholes — it also emphasised the urgent need for legal expertise at every stage of a financial enterprise. In a fast-evolving digital economy where laws often lag behind technology, lawyers and law firms serve as critical anchors, helping clients navigate uncertainty, prevent collapse, and respond effectively when crises erupt.
Here’s how legal professionals step in before, during, and after financial disasters like FTX:
1) Before the Storm: Building Strong Legal Foundations
The FTX collapse was, in many ways, a result of unchecked operations and absent legal structure. A lawyer’s preventive role is to ensure such gaps never occur in the first place.
🔹 Regulatory Compliance Advisory
Law firms help businesses interpret and follow the web of crypto, securities, tax, and AML laws across jurisdictions. For global exchanges, this means aligning with:
– U.S. SEC and CFTC regulations, EU’s MiCA- framework, India’s Income Tax Act and FEMA regulations, Global AML/KYC protocols
Proactive legal advice prevents the kind of jurisdictional arbitrage FTX exploited by setting up in lax regulatory zones.
🔹 Drafting Governance and Risk Protocols
Crypto businesses grow fast—but legal infrastructure often doesn’t keep up. Lawyers create:
– Shareholder agreements, independent board structures, Escrow and fund control mechanisms, Internal audits and whistleblower protections
2) When Collapse Hits: Legal Response and Crisis Management
Once a financial institution falters, the legal focus shifts to damage control and recovery.
🔹 Bankruptcy and Insolvency Support
Law firms represent various stakeholders—creditors, investors, or even employees—during insolvency proceedings. In the FTX case, lawyers were essential to:
– Trace asset movements across jurisdictions, File bankruptcy claims, Secure interim relief and protect customer funds
🔹 Litigation and Enforcement Action
Whether representing victims of fraud or defending executives facing regulatory action, lawyers play a frontline role. This includes:
– Filing or defending civil suits, participating in class actions, engaging in criminal defence (e.g., fraud, money laundering charges), Responding to regulatory investigations from agencies like the SEC or ED (in India)
3) Aftermath and Reform: Shaping the Legal Future
A major collapse is also an opportunity to rebuild the legal framework for an industry.
🔹 Legal and Policy Advisory
Lawyers are instrumental in:
– Helping governments design new crypto and digital asset regulations, advising regulators on tax compliance and consumer protection, collaborating with international bodies to draft cross-border enforcement treaties
In the wake of FTX, many law firms are advising central banks, finance ministries, and tax departments on building secure digital finance ecosystems.
4) Client Representation: Investors, Startups, and Corporates
Legal professionals don’t just work with large institutions. They also guide individuals and smaller entities who suffer in the fallout.
🔹 Retail Investors
Lawyers assist with:
– Filing complaints and recovery claims, Tax disclosures for lost or inaccessible crypto assets, Navigating international arbitration
🔹 Startups and VCs
For crypto-native ventures:
– Law firms conduct legal due diligence before investments, Draft enforceable smart contract frameworks, Guide restructuring or M&A after collapses
5) Looking Ahead: Making Legal Advice a Core Business Strategy
The FTX collapse is a wake-up call: law must evolve alongside finance, not after it. In the crypto world, risk isn’t just technical—it’s legal, tax-based, and regulatory. Whether you’re a startup founder, a VC, or a trader, having the right legal team is no longer optional—it’s essential.
In a decentralised financial world, law is your only central security.
Conclusion: Law as the First and Last Line of defence
The collapse of FTX was not just a financial disaster—it was a legal failure. It revealed how quickly innovation can outpace regulation, how easily global platforms can dodge jurisdictional oversight, and how devastating the consequences can be when legal safeguards are missing or ignored.
But amidst the chaos, one truth stood out: robust legal frameworks and expert legal counsel are essential to the future of digital finance. Whether it’s ensuring compliance, protecting consumers, assisting regulators, or driving policy reform, lawyers and law firms are indispensable in bridging the gap between evolving technologies and the rule of law.
As crypto continues to reshape the global financial system, the legal community must rise not only as regulators but as architects of accountability. FTX may be a symbol of failure—but it also serves as a turning point, urging lawmakers, investors, and innovators alike to build a future where transparency, governance, and legality are not afterthoughts but foundations.
