The Collapse of FTX

CRYPTODAY 102

1. This last week, the only story dominating the news cycle was the stunning collapse of one of the world’s largest crypto exchanges, FTX. Let’s talk about how we got here. In 2019, Binance became an early investor and shareholder in a young FTX. The exchange’s CEO Sam Bankman-Fried (known as SBF in most circles) was just beginning his meteoric rise to power at the time, and Binance’s investment was the classic hedge: the easiest to keep an eye on your new competitors is to buy a piece of them. And for awhile, the bet looked good: SBF’s exchange grew to over a million registered users, eventually finding themselves amongst the top 5 exchanges in the world. And as a result of their successful $FTT token, SBF also found himself sitting on a personal net worth of over $16B.

2. In July 2022, FTX decided to buyback Binance’s shares in their business, and they did so by paying CZ’s company in $FTT: over $2B worth of it. In theory, this was advantageous because $FTT was their own token that they had issued from nothing, but it was this one move that inadvertently set a chain of events in motion that no one was expecting. Fast forward to November 2nd. Coindesk wrote a long takedown of FTX based on a leaked balance sheet, which showed a dangerous dependency on $FTT (nearly half of their treasury was simply their own token). Just four days after that, CZ announced that Binance would be clearing their books of $FTT, which meant that they would be selling over $580M worth of the token into the public market. The total market cap of $FTT was only $3B, so it was the kind of market signal that simply couldn’t be ignored. Over the next 24 hours, businesses began preemptively withdrawing their funds from FTX, for fear that a bank run was about to occur. It was a classic self-fulfilling prophecy, with crypto banks like Nexo withdrawing over $200M of their funds in one go.

3. By November 8th, SBF made the shocking revelation that he was in talks to sell FTX to Binance. The bank run was still in full force, but his exchange no longer had the funds to cover all of their customers’ assets. Where did the funds go? Supposedly FTX was lending some $10b worth of its customers’ deposits to its sister company Alameda Research, and the latter was unable to pay it back. When the truth came out, SBF saw his net worth drop by over 90% overnight, and $FTT dropped from $22 to $4 in the same period. $FTT is now hovering above $2, and has dropped out of the top 100 coins. SBF’s net worth has been downgraded to $0 by the Bloomberg Billionaires index.

4. Binance stepping in to pick up the pieces was a ray of hope for customers who were now unable to withdraw their funds, however, even this was short-lived. The following day, Binance published an official statement explaining that they would not be pursuing the acquisition; FTX was “beyond help.” SBF wrote a long, sad Twitter thread describing his mistakes, and vowing to make their customers whole again. A few hours after that, FTX announced that they were working with Justin Sun and Tron to return selected tokens to customers, mostly anything from the Tron ecosystem ($TRX, $BTT, etc). Theoretically, that means that a customer of FTX could voluntarily convert their funds into any of those tokens in order to withdraw them, so Justin Sun’s angle is mainly to drive demand for $TRX and its siblings.

5. SBF is currently on the hunt for about $9B in “rescue funds.” There are reportedly over 40 distinct investors currently poring over FTX’s books. It remains to be seen who would be brave enough to pick up the tab, especially considering that CZ, crypto’s richest man, has already declined. I don’t personally have any funds in FTX but I did have a substantial amount of funds in BlockFi, which is one of the companies that FTX bailed out earlier this year. Just a few hours before I started writing this newsletter, on Friday morning, BlockFi announced that it would be suspending all withdrawals, to await “further clarity” on the situation. BlockFi reportedly had all of their customer funds custodied with FTX, so I am not hopeful.

6. It is not an exaggeration to say that the fallout from FTX’s demise is going to have far-reaching consequences across the industry. Even for the companies who have signaled that they have zero exposure to FTX or Alameda Research, there is now a new level of customer distrust that they will need to overcome. There will likely be a new wave of regulations as well, now justified by the irresponsible actions of SBF and his crew. That said, no regulation would have been able to prevent FTX from playing fast and loose with their customers’ funds. (They’re registered in, and operate out of, the Bahamas on purpose.) The Miami Heat has begun dismantling the FTX sign on their arena, which was part of a 19-year-long naming rights deal that SBF signed last year. VCs like Sequoia, Paradigm, and Temasek are down over $200M a piece on their investments in FTX. Jesse Powell, founder of one of the oldest crypto exchanges Kraken, described it all this way: “An exchange implosion of this magnitude is a gift to bitcoin haters all over the world.”

7. It’s a sad week for the industry and I wish I could end this newsletter on a more optimistic note, but that would be disingenuous given how wide-reaching this contagion is. What I can say is that the story is still developing, and I’m hoping I’ll have time to properly describe everything that’ll happen over the coming weeks. However, I do have both the Philippine Web3 Festival and Axie Open Manila to manage next week, so I can’t promise that I’ll have the energy. If you’re one of the folks affected by FTX’s collapse, my heart goes out to you. Know that you’re not alone. We’re in this together, cryptofam. Stay safe out there!