The collapse of FTX, one of the world’s largest cryptocurrency exchanges, has unleashed yet another wave of volatility in the highly speculative digital asset market. The fortune of FTX founder Sam Bankman-Fried went from nearly $16 billion to zero in a matter of days when his crypto empire filed for bankruptcy protection in the US on Nov. 11. Here we answer some of your questions about the story so far.
How was FTX structured and what was the business model?
In business terms, FTX was a chaotic web of over 100 different companies, all united under the common ownership of Bankman-Fried and his co-founders, Gary Wang and Nishad Singh. In a bankruptcy filing, John Ray III – a US bankruptcy specialist who previously oversaw Enron’s collapse – described it as four main “silos”: a venture capital arm, which invested in other companies; a hedge fund, which traded crypto for profit; and two exchanges, one supposedly shielded and regulated from the US public, and one international exchange where the rules were much freer.
The income streams were as diverse as the company, but the core of the group was the stock market. Most people buy cryptocurrency by transferring money (“fiat”) to an exchange such as FTX, which works like a currency exchange and trades currency pairs at a floating exchange rate. FTX’s regulated exchange provided that service, and the company took a cut of every trade, but the big money was in the much more aggressive trading on the international exchange, where traders would try to profit from fluctuations in crypto prices. assets, borrow money to increase their potential income (or losses). The more complex the transaction, the greater the savings.
Why did it collapse?
In the short term because of a token called FTT. This was effectively a share of FTX, which the company issued itself and promised to buy back with a portion of its profits. But documents leaked to news site CoinDesk suggested that Alameda, the group’s hedge fund, used FTT to make high-risk loans — effectively trading with corporate securities. The revelation prompted a major holder of FTT, rival exchange Binance, to declare that it was selling its holdings, sparking a run on the exchange as other clients rushed to withdraw their funds.
In the medium term, it collapsed due to deeper issues related to the link between FTX and Alameda. The exchange did not have the option to accept wire transfers, so customers would send money to Alameda and FTX would credit their accounts. But the actual money was never passed on: Three years later, Alameda had held, traded, and often lost $8 billion in FTX client funds. When the stock exchange run began, FTX couldn’t find the money it thought it had because it never took it.
In the long run, FTX failed because the company was a mess. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as here,” said Ray, the bankruptcy specialist.
What does the fate of FTX tell us about cryptocurrencies?
Various conclusions have been drawn within the sector. Some have argued that the collapse is a triumph for “decentralized finance,” or DeFi, which uses computer code to build versions of financial services that don’t rely on trust or a central party. The head of a DeFi exchange cannot buy a $40 million penthouse with client funds because there is no head.
But outside the sector, the conclusion is clear. Cryptocurrencies are a bet on the idea that a world where government power over money and finance is ended would be a better one: the collapse of FTX is perfect proof that government regulations on finance are actually quite useful.
Will people get their money back?
Some people get some money back, but no one gets everything. Even Bankman-Fried is convinced that it would take an $8 billion capital injection to make every saver healthy. But the accounts presented by Ray make it clear that this is wishful thinking. There isn’t even a single document detailing all of the company’s depositors, he says, and while the balance sheet suggests a healthy mix of assets and liabilities, “I’m not confident and the information therein may not be accurate at the time of writing.” stated date”.
Robert Frenchman, a partner at New York law firm Mukasey Frenchman, said FTX clients in the US whose funds are tied up in the failed company will have to join a creditor queue because there are no special protections for clients of unregistered companies. crypto companies like FTX.
“There is no backstop here for US customers, unlike bank or brokerage account holders. The customers will have to battle it out with everyone because they have no special protection. They enter this process as individual creditors, or as a group of creditors if they work together, battling it out with legions of other creditors, great and small.”
In the meantime, the US Attorney’s Office for the Southern District of New York is reportedly investigating the matter and US Treasury Secretary Janet Yellen has said crypto markets need more robust oversight.
Could there be contagion within the crypto markets?
There are already signs of a spillover effect. BlockFi, a cryptocurrency lender bailed out by FTX over the summer, has halted customer withdrawals, admitting it has “significant exposure to FTX.” On Wednesday, crypto exchange Genesis “made the difficult decision to temporarily suspend redemptions” from the company’s lending business following a series of withdrawals from the service.
This week, the CEO of Singapore-based crypto exchange Crypto.com said his company would be wrong if anyone who said the platform was in trouble, adding that it had a robust balance sheet and was not taking risks . Kris Marszalek made the statement after investors questioned the transfer of $400 million in ether tokens from Crypto.com to another exchange called Gate.io on October 21. Marszalek said the transfer was a mistake and the ether tokens had been returned to the exchange.
Crypto market watchers expect more instability, although the main crypto asset, bitcoin, has held its ground this week by staying mostly flat at around $16,700.
Teunis Brosens, head of regulatory analysis at Dutch bank ING, said the crisis would “definitely deepen” the last crypto winter, leading to the value of the crypto market falling from $3 trillion last year to less than $1 trillion now.
“In terms of prices, we saw bitcoin pretty stable around $19,000-$20,000 for months. I think it is likely that we are now looking for stability at lower levels, but first the storm has to pass, and we are certainly not there yet.”