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11 Nov 2022

The Friday/FTX Focus: Issue 59

Arguably the worst hit to the crypto industry ever took place this week. FTX, one of the largest crypto exchanges in the world, collapsed. A week full of rumors, wild accusations, and crashing prices, but don’t worry; we’re here to summarize it for you.
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The FTX Collapse
This situation is a mess. Some of the information here might be outdated by the time you read this, and we might have missed today’s breaking news, but this is our attempt to give you some sort of overview of the situation.So:
  • FTX reportedly used customers’ funds to prop up Alameda Research and has now filed for Chapter 11 bankruptcy.
  • Yes, one of the largest crypto companies in the industry was playing with customers’ money. An embarrassment for the industry, but it also reminds us of what an unregulated wild west this still is.
  • The beloved CEO of FTX, Sam Bankman-Fried, a self-proclaimed supporter of effective altruism, friend of politicians in Washington, and the world’s richest 30-year-old just a week ago, went from hero to zero.
  • We still don’t know all the details, but the most plausible explanation for the collapse of FTX is the connection to its own trading desk, Alameda Research. FTX reportedly covered up losses for Alameda with customer funds, which resulted in a big hole in the balance sheet of FTX.
  • Fear started spreading with a Coindesk article showing Alameda’s exposure to FTX’s own exchange token FTT and collateralized positions with FTT. Following the release of the article, Binance’s CEO CZ publicly criticized FTX and FTT, saying that Binance would sell its position in FTT held since Binance’s FTX exit in August 2021.
  • FTT crashed, and a bank run from FTX was initiated, with assets worth billions of dollars being withdrawn, resulting in FTX halting withdrawals.
  • The shock was complete when Binance announced an LOI to acquire FTX and save the customers. However, after a swift due-diligence process, the company walked away from the deal. How much cash FTX needed is unclear, but we’ve seen numbers ranging from $5 billion to $10 billion.
  • Sam Bankman-Fried, tweeted that they ran out of liquidity and were looking to raise capital to make customers whole again.
  • Some withdrawals have been completed even after the halt. FTX secured a deal with Tron, letting customers withdraw some specific tokens, although just starting with covering $13 million. On-chain movements also show other unannounced withdrawals, some related to FTX’s regional exchanges and Bahamas-based customers, but rumors also point to FTX employees being bribed to help with withdrawals and to help users falsely KYC themselves as Bahamian residents.
  • The contagion from this will undoubtedly evolve over the next weeks. We’ve already got the news that BlockFi has halted withdrawals, a concerning development from the lending firm rescued by FTX earlier this year.
  • Other names being hit by this so far are Genesis, Galaxy, CoinShares, GSR, and investors in FTX like Tiger, Amber, Sequoia, and Blackrock are already telling investors that they see the investment as lost.
  • Most FTX employees were reportedly unaware of the poor risk management and are as shocked as the rest of the industry, with many losing all life savings they had on FTX or through equity in the company.
  • Regulators are naturally all over this, calling for greater regulation and faster legislative action.
Again, this is a short and most likely incomplete overview of the situation but hopefully leaves you just a bit more informed. We also covered what happened before the bank run here and what implications it can have here. We’re keeping this section short and sweet today, but here are other headlines from the crypto industry this week:
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