“We have so much liquidity that it’s no problem for us to buy an investment bank like Goldman Sachs,” exclaimed Sam Bankman-Fried, founder of FTX, a crypto exchange valued at $32 billion and the world’s fourth-largest digital asset exchange platform, in July 2021 in the Financial Times.
On Friday, November 11, 2022, one year and four months after this statement, Bankman-Fried resigned, and FTX issued a press release via Twitter announcing that the FTX Group, consisting of approximately 130 other companies, has filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. This is the most extensive crack in the crypto world to date.
On November 2, 2022, information services specialist CoinDesk released a report on the economic standing of FTX, an exchange founded by Bankman-Fried in 2019 that uses FTT as a utility token, and Alameda Research, a trading company based by Bankman-Fried himself and under allegations of being loosely connected to FTX.
CoinDesk asserts that within Alameda Research’s balance sheet, it has emerged that the latter is “heavily” dependent on the FTT token, which it uses as collateral to borrow further. In different words, the FTX exchange would be involved in Alameda considerably more than Bankman-Fried has always claimed. And therefore, The value of FTX is maintained by FTX’s token repurchase and burn program.
The catastrophe commenced three days later with Changpeng Zao (CZ), CEO of Binance, tweeting that he would sell all the FTTs that Binance had in its portfolio (over 500$ billion in value of FTTs) to avoid the risks of liquidity problems noted within CoinDesk’s report. Hence CZ’s conclusion is to sell everything.
The immediate consequence of this assertion was the total collapse of the FTT tokens, on the one hand, because small investors got scared and started withdrawing funds and on the other hand, because both Alameda Research and FTX started selling to scrape together money in order not to become insolvent.
On November 8, CZ announced that it would buy FTX to help it cover liquidity problems. During a face-to-face meeting to review internal balance sheets, at that moment, one realized that the CoinDesk report was telling precisely the truth: Alameda had $14.6 billion in assets as of June 30, most of it consisting of FTT utility tokens, issued by FTX.
While there is nothing untoward or wrong with this, it does reveal that Bankman-Fried’s trading giant Alameda rests on a foundation primarily made up of a token invented by a sister company and not an independent asset such as a fixed currency or other cryptocurrencies.
The result was that financial statements showed that FTX was close to bankruptcy and would have an $8 billion deficit.
Simply put, Sam Bankman-Fried raised capital from investors by inflating the value of FTT tokens. The latter was helping him grow the capital FTX needed in exchange for shares in the company, just as one does with stocks. These investors included Binance, which is why it held that large share of FTT tokens.
The problem is that then Alameda, a large market maker that can move the market and condition and induce smaller investors to buy the FTT token, inflated its value by getting smaller investors to buy it to sustain its price during the last few years. The result was that the price of FTTs went up, so Bankman-Fried was able to show investors excellent results on the balance sheet for both his companies, for both FTT and Alameda, which still had large portions of the FTT tokens that had gone up in price inside. This allowed him to raise additional capital, creating a cycle that allowed him to reap the price inflation while simultaneously raising cash.
So CZ, again surprisingly, backed out of the deal, claiming that the problems were beyond their ability to help.
The result of this move scared away small investors, who saw one of the industry’s largest exchanges fall into the void, concurrently Alameda and FTX wanted to liquidate most of their positions to salvage what could be saved, and many traders opened short positions on BTC, FTT, and SOL. As a result, Bitcoin touched a price of 15000$.
The consequences of this affair are still difficult to calculate. In fact, over the years, FTX, under its blue-chip classification, has had venture capital funds, U.S. pension funds, and investment banks among its investors.
Also, to date, trapped in FTX’s “back door” system for the transit of money in secret contrived by Bankman Fried are 100,000 remaining clients, including such big fish as Japan’s Softbank, hedge funds Galois, and Sequoia. But there would also be the Ontario Teachers’ Pension Fund and the ubiquitous Blackrock, and analysts are calling FTX the “Lehman Brothers” of cryptocurrencies, a comparison that is not far-fetched as the “too big to fail” concept heard back in 2008 comes up again; saving exchanges means saving billions in savings and investments, and the real risk is that chain failures will begin to occur, and the more the price falls, the more accurate this risk becomes.
Many crypto market players are now asking: could a single crypto regulation make a difference? The absence of clear, one-size-fits-all rules for all industry players is another perspective from which to look at recent events, and the FTX crisis is symptomatic of this lack in the more regulated countries from which cryptocurrency exchanges flee because of oppressive policies, exchanges that paradoxically find themselves with full freedoms once they move abroad., prices not seen since November 2020. On the other hand, the FTT token went from $26 to $2 at the moment, more than 90% in value. The SOL token, the active token in the Solana ecosystem and funded by Alameda and FTX, also lost more than 70 percent in value, coming in at $12. During the 2021 bull run, it had a value of $260, for a capitalization of about $70 billion.
The consequences of this affair are still difficult to calculate; over the years, FTX, under its blue- chip classification, has had venture capital funds, U.S. pension funds, and investment banks among its investors.
Also, to date, trapped in FTX’s “back door” system for the transit of money in secret contrived by Bankman Fried are 100,000 remaining clients, including such big fish as Japan’s Softbank, hedge funds Galois, and Sequoia. But there would also be the Ontario Teachers’ Pension Fund and the ubiquitous Blackrock, and analysts are calling FTX the “Lehman Brothers” of cryptocurrencies, a comparison that is not far-fetched as the “too big to fail” concept heard back in 2008 comes up again; saving exchanges means saving billions in savings and investments, and the real risk is that chain failures will begin to occur, and the more the price falls, the more natural this risk becomes.
Many crypto market players are now asking: could a single crypto regulation make a difference? The absence of clear, one-size-fits-all rules for all industry players is another perspective from which to look at recent events, and the FTX crisis is symptomatic of this lack in the more regulated countries from which cryptocurrency exchanges flee because of oppressive policies, exchanges that paradoxically find themselves with full freedoms once they move abroad.
Federico Turchi
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