So you have probably heard at least a little about FTX, and if you’re like most people outside of the crypto world (read: most people), you may not have been following closely enough to understand everything that is going on. And there is a LOT going on. Let’s break this down a bit:
For a little backstory, FTX was run by a man named Sam Bankman-Fried, who goes by his initials SBF and is on Twitter as @SBF_FTX. As a reminder, the crypto world lives on Twitter, follow me there @CryptoDoc20. SBF made millions of dollars with his company Alameda Research Group by leveraging geographic arbitrage a few years ago buying Bitcoin in the US and selling it in Japan. He jumped through the regulatory hoops of banking in Japan and turned millions into billions and made quite a name for himself. He parlayed that name and fame into a crypto exchange he started called FTX. These companies are inextricably linked because Alameda served as a funding source and market maker for trades on FTX. Plus, SBF owned both, and, as we are now finding out, intermingled accounts and gave Alameda preferential treatment on the FTX platform. Of course, these are illegal based on US laws, but FTX wasn’t a US operation.
The crypto world is digital, and people all over the planet are able to transact all over the planet. Entities/governments that want to control their citizens have created barriers to effect these controls. A prime example of this are the KYC/AML rules implemented by OFAC at the US Treasury. These Know Your Customer and Anti-Money Laundering rules are implemented with the goal of tracking the bad actors of the world, and making sure the governments know who to tax. Every time you have signed up for a bank account, credit card, or a loan in a G7 country, I’m sure you have filled out these forms so that the government can track you. Well, plenty of the operations in the digital world, and now the new digital money (crypto) world is operating outside of these rules. Binance, the largest exchange, and FTX the second or third, depending on metrics, are both operating without compliance.
Regardless of your view on the appropriateness of interstate or international money transactions, things are legal until they're not. As an example, remember in the late 1990s, early 2000s when interstate internet purchasing wasn't taxed? I recall specifically ordering items from another state if there was a way to avoid the state tax on it. Feel free to insert a Libertarian view on whether the government should be taxing citizens or not, but the reality is that even if KYC/AML is required, determined individuals will find ways around it, legal or otherwise. That may mean money launderers bribing a bank for large transfers, or creating shell companies inside shell companies in Panama. But these things are being done, and ultimately most blockchain technologies are going to shine a light on them. (Privacy coins like Monero will not.)
Obviously a lot of the money in the world is inside the countries that are OFAC compliant (especially USA), so a couple of years ago, both Binance and FTX created compliant entities called Binance.US and FTX.US. If you try to access the domain the parent company from within the US, you will be automatically prompted to go to the US one. Theoretically, FTX.US was a subsidiary of FTX international, and everything on the US site was handled in a compliant way. However, when FTX went bankrupt, the US subsidiary was included, so we will have to see how this plays out in court. SBF argues that the .US is separate and solvent, but it does not appear that way to the bankruptcy court, or the folks on Crypto Twitter.
I skipped ahead to the bankruptcy. So I had previously covered Celsius and Voyager’s Bankruptcy. 2022 has been a spectacularly bad year, with gigantic collapses of Three Arrows Capital, Terra/Luna, Celsius, Voyager, and now FTX/Alameda. I confess that it took me months to recover to the psychological insult of having the companies that I was trusting in the brave new crypto world to treat their customers so badly. However, I didn’t have any funds at FTX, and I have been watching with amazement, and less anger. Here’s how this latest bankruptcy unfolded:
FTX/Alameda were presumed to be ‘The best’ in the industry. SBF was offering to save other companies, and had lent to BlockFi when they were in trouble months ago, and had become the winning bidder on the Voyager assets during their Chapter 11 bankruptcy. But, on Wed November 2, 2022, CoinDesk published an article that exposed the balance sheet of Alameda, and it was extremely over-leveraged. FTX had created a crypto token called FTT that was only useful on their website. FTT didn’t give ownership in the company, it was more like frequent flyer miles, and you could use them to get better rates in the exchange. Well, Alameda owned considerably more tokens than could be sold into the market, but were pricing them as if they were fully liquid. In addition to the FTT, Alameda was relying heavily on Solana ($SOL) and Serum ($SRM) tokens to prop up their balance sheet.
Once this balance sheet leaked, the rest of the crypto economy realized that Alameda was in way over their heads, and pounced. The FTT token was valued around $25 on Nov 2, although was $50 in April 2022 and $70 just a year ago. Today FTT is around $1.25, and I expect it to trend to zero based on the rest of the FTX details. This is not a chart you want to see on an asset you own. (I never bought any.)
Here's the rapid crash of FTX:
Nov 2: CoinDesk article spooks everyone.
Nov 5: a Twitter Bot tracking large trades shows 23M FTT tokens ($584M) moved to Binance.
Nov 6: Something like $5B was withdrawn from the FTX exchange.
Nov 7: SBF tweeted that everything was fine, shortly afterwards deleted that tweet. CZ, CEO of Binance announced the half-billion dollars of FTT moved was his/Binance.
Nov 8: CEO of Binance says they are going to aquire FTX. SBF Agrees.
Nov 9: Binance, after looking at the books, says nevermind. (only 24 hrs!). Also says this was not 4D chess move to take down FTX.
Nov 10: FTX has paused trading. Sam apologizes on Twitter.
Nov 11: FTX files for bankruptcy. SBF Resigns. FTX is hacked for around $450M that night.
Nov 12: FTX lawyer confirms funds were stolen after the bankruptcy.
This is just crazy, and being tracked on real time in Twitter. Billions of dollars of wealth evaporated overnight, and what has come to light since then is that the relationship between Alameda and FTX, which was seemingly above board, was DEFINITELY NOT. With all the attention, and the rapid downfall of the white knight SBF, it has become apparent that FTX customer funds were transferred to Alameda to keep Alameda positions whole, that Alameda was given special treatment on the FTX exchange, that principles involved in both organizations were regularly living/sleeping/working together and that basically nothing was separate. SBF had reported previously to Forbes to prove his wealth that he owned 90% of Alameda and 50% of FTX. SBF stepped down from CEO of Alameda the summer of 2021 and put Sam Trabucco and Caroline Ellison as co-CEOs. Trabucco resigned in August 2022, and left Caroline in charge. Brett Harisson, President of FTX.US resigned a month afterwards. This is obviously a suspicious constellation of corporate turnover.
More shenanigans going on at FTX/Alameda include questionable relationships with Bahamian regulators. SBF has said on Twitter spaces that he gave the locals a warning and let them withdraw funds AFTER the pause. Supposedly $100M withdrawn by 1500 'Bahamian Residents.' (Are SBF, Gary Wang, and Vishad Singh included in that? or Bahamian regulators?) FTX also invested $115M into an obscure one-branch bank in rural Washington and renamed it Moonstone. Additionally, the FTX Chief Regulatory Office was a previously disgraced lawyer Dan Friedberg, who somehow escaped jail in an online poker scandal at UltimateBet . There were large donations to political parties, and SBF was trying to push legislation through DC that possibly would have covered up some of this behavior. The scandal just keeps growing.
If you were following the Celsius blowup with me, you might have seen the Celsius Short Squeeze, where the $CEL token (this is like the FTT frequent flier miles equivalent on Celsius, and I DID buy some of those) had been frozen during the Celsius bankruptcy, but there was a small supply outside of that ecosystem. It was being traded on FTX. I learned about the short position back in July and got involved/interested and put a little money and a lot of time into that trade. At one point 200% of supply was shorted. As it turned out, FTX was closing the short position on their platform without buying the token. Now, this wound up being small potatoes in the grand scheme of things, but it looks like Millions of dollars were spent by actors at FTX (or Alameda) to defend this short position.
In addition to what I observed regarding $CEL, I have heard of manipulation of other coins by FTX. No one would have believed these things at the time, but it looks like they were bullying small projects and getting away with it. Internet Computer Protocol ($ICP) is a project that appears to have been sandbagged by FTX. Reef Finance $REEF claimed last year that Alameda screwed them over. NuGenesis created a NuCoin that was traded on FTX and they also claim to have been scammed.
FTX has already released some documents to the bankruptcy court, and it may make you cry. SBF had claimed there was $5.5B on the balance sheet, but the filings say $659M.
And, on top of all of this, when the bankrupt FTX balance sheet was leaked, it showed the assets on the platform and the liabilities. There were no Bitcoin and no Ethereum on the balance sheet. So all the people and institutions that thought they held these globally important technologies, actually did not.
There are two small things that I can see as a positive out of this gigantic pile of garbage that SBF has created.
There is unsatisfied demand to own bitcoin, because the poor customers that were trusting FTX to custody their bitcoin for them actually did not own it. FTX didn't take the supply out of the global market that would have satisfied those customer's demand. Keep in mind that FTX was the third largest exchange, so this is not a small number.
More people are going to learn from this the importance of self custody. It is a very painful lesson to learn, (I know, I learned it the painful way) but this is an important lesson.
I'm sorry for everyone that got caught up in this. Trusting someone to be responsible with your asset is a bedrock of modern finance. This was theft and fraud on a grand scale. SBF has been on an interview tour claiming to not have known what was going on. Don't believe his lies. I have suspicion, but no proof as of yet, that he and Alameda may have orchestrated the Terra/Luna depeg that started the dominos falling. It would make sense, as there was so much interconnected loans in this ecosytem. In hindsight, there were obviously TOO many interconnected loans in the ecosystem.
As I have been watching the Celsius and Voyager bankruptcies play out for the last 6 months, I know that the FTX customers have a lot of frustration ahead of them, as FTX is a more complex entity (134 companies!) with considerably less equity on their balance sheet than Celsius.
Thanks for reading. Stay tuned for more.
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