THE FTX CASE
Author: Gerardo Pirillo, M&A Junior Associate
Some call it the“Lehman Moment”of crypto currencies.
The bankruptcy of crypto giant FTX and the resignation of its founder, Sam Bankman-Fried,
It all started with the publication of the accounts of Alameda Research, a reality linked to double thread with FTX, and with the detection of the fragility in terms of finishing the exchange, noticed by some online newspapers.
Binance, the first CEX in order of importance, then announced its intentions to get rid of its FTX tokens (FTT), starting the pandemonium. Twitter, in the week, literally caught fire, with a whole series of statements by the protagonists that have created total chaos. And starting from an exchange of views between FTX and Binance, with Changpeng Zhao intended first to fail his colleague Sam Bankman Fried and then, not even 24 hours later, to save him, with a pre-agreement agreement then failed.
In the total confusion the injured party remains the crypto industry in general, not only in terms of numbers, but especially reputation, with a precedent that goes to damage not just the whole CeFi universe. Decentralization, in these cases, always returns to be a valued virtue, along with the themes that revolve around security.
To clarify the crisis, and especially experience of what happened, it may therefore be useful to go back over the whole story, looking for its causes, and trying to predict what will be the future scenarios of the crypto world, strongly touched by the whole thing.
FTX, Binance, and the deal blew
Let’s start at the end. Binance, at the conclusion of a crisis with surreal traits and that has shaken the crypto world, has withdrawn the acquisition offer of FTX. And the market did not react well, in a scenario that saw the exchange of Sam Bankman Fried left to its fate. Bitcoin crashed to $15,000, while stablecoin fought to keep their ankle to the dollar.
The exchanges, on the other hand, ran for cover, in a race for who can guarantee more than their accounts are in place. Binance was the first, who, in moving away from the agreement with the competitor, cited "poorly managed client funds", unlike his own, and an investigation opened by the SEC against the CEX of SBF.True or not, from this point of view, the point is certainly not far-fetched. The antitrust regulators, if an agreement had been reached, would not have remained immobile in front of a monopoly of Binance, which would have covered 80% of the global share of the crypto market.
The reaction of the crypto industry
On the market side, however, the scenario sees a race to who "short" faster, and this has only made all kinds of cryptocurrency collapse, with a total liquidation level that has touched the billion dollars.
Changpeng Zhao, CEO of Binance, then spoke about the conclusion of the story, offering food for thought for the future of the crypto industry, and especially CeFi. Such as the fact that exchanges should be required to provide documentation that actually attests to their financial condition, and ultimately to prove that they are not insolvent.
The idea is not new, but it seems that the recent events have definitely changed the cards on the table, so much so that several other exchanges, such as OKX, Huobi and kucoin, have released statements stating that they are willing to publish data on their "reserves"addressing market and user concerns head-on.
The whole thing Binance-FTX, as you may have guessed, then destabilized the market also in a collateral sense. Solana, which is an ecosystem closely linked to that of FTX (an exposure of two billion dollars), to cite a case, has suffered (quite a lot) the crisis of the exchange, and since the beginning of the week SOL has lost more than 50% of its value. "We don’t see it as a 'win' for us," CZ said on twitter. "User confidence is severely compromised, and regulators will end up looking at exchanges even deeper, making licensing more complicated". And as it happens regularly in times of crisis, another asset that is most tested is that of stablecoins. In this case, Tether (USDT), USD Coin (USDC), Dai (DAI) and Binance USD (BUSD) all fell below the dollar value, slightly losing the peg. And even though we don’t see any signs right now that could lead to circumstances like the Earth case, the feelings remain less positive. The register has not changed either. As for exchanges, in fact, even realities like Circle and Tether were asked to reveal what their financial relations were with Alameda Research and FTX. Paolo Ardoino, CTO of Tether, said that USDT has no exposure to FTT, and similarly Jeremy Allaire, CEO of Circle, categorically denied having ever granted loans to FTX or Alameda, receiving FTT as collateral. Coinbase, itself the third most important crypto company after Binance and FTX, commented on the case of the deal as "risky business practice", and CEO Brian Armstrong said his closeness to the users involved.
Coinbase, incidentally, also pointed out that it is not at all exposed to FTX assets, but those that have remained "burned" are not few.
Galaxy Digital, for example, reported exposure to FTX for 76.8 million dollars, of which 47.5 "in withdrawal". Or the Ontario Teachers Pension Plan, a Canadian pension fund, which participated in a $400 million funding round for the exchange (investing 200), along with organizations such as softbank, Lightspeed Venture Partners and Paradigm. And yet BITDao, with 100 million BIT tokens in the hands of Alameda, and Sequoia Capital with 150 million dollars invested.
Not to mention, finally, BlockFi and Voyager, paradoxically recently "saved" by FTX. Because of this, in fact, it has arisen the doubt that a whole series of investments of FTX were simple covers to the real state of financial health of the CEX, to arrive at a state of "too big to fail". Remember, in this sense, that only in 2022 the exchange of SBF has collected investments for 400 million, getting to evaluate the company 32 billion dollars.
"User confidence is severely compromised, and regulators will end up looking deeper into exchanges, making licensing more complicated."
The hints and the perspectives
Another relevant data, however, is represented by an analysis born from various online newspapers, which revealed that the number of active wallets holding FTT tokens is close to zero at least since the beginning of 2022. Apparently, token holders were inactive on the blockchain long before the story began, and since most transactions take place outside, it is deductible that FTT holders primarily use Custodial wallets.
The mind, in such a crisis, can only go back to the times of May 2022, while the collapse of TERRA was taking place. However, for now, the context is not as compromised as it was in those days. Or at least it isn’t for now. If today we talk about millions of losses, for Earth-moon we were in the order of billions.
On the FTX side, CEO Sam Bankman Fried was the protagonist all week in a debate that saw exchanges of opinion, real contradictions and tweet cancellations, all in a very short span of time. One could say that it did not come out well, especially in terms of confidence, and the latest statements would also have tried to refocus the whole situation, trying to open up the slightest prospects.
According to SBF, US FTX would not have had any problems in terms of liquidity, being the US regulation very punctual. FTX International, on the other hand, would have retained a larger amount of assets than user deposits, but not the liquidity needed to keep withdrawals active. After the failure of the agreement with CZ, SBF undertook to find new sources of liquidity, immediately contacting a number of market players for new deals. However, the announcement of bankruptcy was not long in coming, for a week that ended in the most unexpected and shocking way of all.
Grace Berkery, director of startup engagement at the payment processing firm Mastercard, thinks the collapse of FTX will ultimately be a positive for the industry.
“I think it’s an opportunity and time to reset,” TechCrunch reported Berkery as saying at Benzinga's Future of Crypto Event. “At Mastercard, we believe there’s a lot of promise in the underlying technology. There’s a lot happening in the space.”
She added that investors may regard NFTs and metaverse endeavors as a big opportunity, especially if these projects boost customer engagement and loyalty. New institutional investors who do join will be more cognizant about due diligence of their crypto partners going forward, she said.