Sam Bankman-Fried dominated in the crypto community last week. The 30-year-old former billionaire, SBF, founded FTX, the industry’s third-largest exchange. When the value of cryptocurrencies dropped early this year, he gave Voyager and BlockFi hundreds of millions of dollars and bought a crypto hedge firm called Three Arrows. Many people wanted someone like John Pierpont Morgan, who in 1907 saved the American banking system.
Mr. Bankman-Fried spent millions of his $26bn wealth on crypto regulatory initiatives. As an effective altruist, he intended to donate most of the remainder. Politically involved, appearing philanthropic, many felt SBF might rescue the industry, a reputation he did not discourage.
What’s happened? On November 7, clients withdrew $650 million from FTX before it ceased satisfying requests amid rumors of low liquidity. Since November 4, the firm’s profit-sharing mechanism, the FTX Token, has dropped 90%. On November 8, Mr. Bankman-Fried and Changpeng Zhao, the CEO of Binance, the largest crypto exchange, revealed that Binance had signed a letter of intent to purchase FTX. After reviewing the company’s books, Binance withdrew the next day. Mr. Bankman-Fried informed investors that FTX needs $8 billion to avoid bankruptcy. It lost 94% of its value, according to Bloomberg Wealth.
Industry-wide destruction is occurring. Bitcoin has fallen 19% to $16,600 since November 8th. JPMorgan Chase, a bank, has warned crypto markets might suffer a “cascade” of deleveraging and corporate collapses due to the prominence of FTX. Industry reputation may suffer greatly.
Mr. Bankman-Fried vs. Mr. Zhao
FTX, FTX.US, and Alameda Research are Mr. Bankman-Fried’s companies. These are theoretically distinct. Alameda’s relationship to FTX has been unclear. On November 2, CoinDesk reported that two-fifths of Alameda’s assets were FTX tokens worth $5.8bn. That money was approximately quadruple the tokens’ market capitalization, and a portion was tagged as collateral, suggesting Alameda borrowed against them, probably from FTX. In response, Mr. Zhao announced that Binance will sell its FTX tokens, valued over half a billion dollars.
Then, he wanted to buy the business, which led people to think that he was behind the trouble that led to a fire sale. Mr. Bankman-Fried dislikes Mr. Zhao. The Binance CEO has always stated his company is based “nowhere.” It can’t offer different services in several countries, including Britain, because it doesn’t have enough information about compliance. Mr. Bankman-Fried allegedly taunted Mr. Zhao.
However, FTX’s balance-sheet hole suggests that the company’s problems were much deeper than a competitor spreading rumors. FTX’s and Alameda’s beanbag-filled workplaces’ mishaps are unclear. An exchange, which takes a spread from buyers and sellers, should be hard to fail. Since it keeps assets for investors, runs are rare.
When such organizations lend crypto tokens they hold on behalf of investors in return for collateral, like cash or other tokens, problems might arise. Alameda may have borrowed consumers’ funds using FTX tokens, issued by the exchange. As the value of FTX tokens fell, the business didn’t have enough assets to meet customer obligations. This started a negative cycle. Bloomberg thinks Alameda and FTX are worth $1 when estimating wealth. Sequoia, a venture capital company, informed investors that it had written down its exchange holdings to zero.
Reports from November 9th say that the Securities and Exchange Commission, which is America’s top financial regulator, has been looking into FTX’s fund management and Mr. Bankman-Fried’s businesses for months. The US Justice Department is also probing the corporation. The company is silent on both stories.
What’s the Effect for FTX and Entire Industry?
A poorly constructed stablecoin, a hedge fund, and other dangerous lending platforms were the sole crypto winter casualties. FTX, a respected company, and Mr. Bankman-Fried are devastated. Other institutions are attempting to reassure clients. The large exchange Coinbase has reassured the press. However, its share price has dropped 20% in recent days and is near all-time lows.
The fall of FTX may reverse crypto adoption by organizations, individuals, and governments. A Singaporean wealth fund called Temasek, a Japanese tech-investing company called SoftBank, and a Canadian fund called Ontario Teachers’ Pension Plan have all put money into FTX. Legislators will now distrust crypto. Whatever caused FTX’s collapse, the industry’s loss is tragic.