The FTX Crypto Fiasco

The FTX Crypto Fiasco

“Only when the tide goes out do you find out who was swimming naked,” Warren Buffett said during the 2008 financial crisis. This time, investors are caught naked by the collapse of the FTX platform, star of the crypto universe.

Well-known institutions lost $1.9 billion in FTX capital, including Ontario Teachers, BlackRock, SoftBank, Temasek and Sequoia. La Caisse, which burned 150 million in Celsius, is in good company.

Worse is the fate of a million customers stuck in an $8 billion cash hole. The bankruptcy of the second largest crypto platform sends a shock wave that will make other victims.

This is the story of Sam Bankman-Fried, SBF for short, bright, likable 30-year-old American in shorts, philanthropist, and Democratic donor. His $24 billion fortune is gone.

His $32 billion empire includes FTX Trading, a cryptocurrency trading platform, and Alameda Research, a hedge fund that does arbitrage trading. SBF and a dozen friends (and lovers) live together and run these businesses out of a condo in the Bahamas, with no regard for governance.

FTX and Alameda have multiplied acquisitions and private placements in 500 crypto companies and 40 venture capital funds, financed with short-term debt. FTX was close to completing the purchase of the Canadian platform Bitvo.

tidal retreat

The receding tide that was supporting markets came this spring, with interest rates rising. Bitcoin and other cryptocurrencies plummeted, triggering the bankruptcy of hedge fund Three Arrows Capital.

Scalded, Alameda’s creditors repossessed their loans, collateralized by depreciating cryptocurrencies. Cash-strapped Alameda “borrowed” $10 billion from FTX clients, without their consent!

CoinDesk, a specialized news site, sounded the alarm by noting that Alameda’s balance sheet had a high proportion of FTT, the token issued by FTX.

Then everything falls apart in a week. The great rival and king of crypto, Changpeng Zhao, head of Binance, announces his desire to liquidate the 500 million in FTT obtained against the sale of a stake in FTX. Frightened, customers rush to withdraw 6 billion; Zhao offers to save FTX, then withdraws the offer from him. The run on deposits ends with the declaration of bankruptcy.

The US and Bahamian authorities have frozen the assets and are investigating. Civil and criminal proceedings are in sight.

Since misfortune never comes alone, a hacker stole 600 million in cryptos, despite the freezing of operations.

error chain

The dust hasn’t settled, but the classic vulnerabilities are evident.

In the first place, the opacity of the balance sheet, which does not make it possible to assess the quality of the assets that guarantee customer deposits. Then, the absence of the lender of last resort, the central banks, which support banks in a liquidity crisis.

Rapid growth through acquisitions, financed with short-term debt, as well as leverage pushed to the limit to generate generous returns on arbitrages of a few cents.

The concentration of power in the hands of a person with an inflated ego, without internal controls or rules on conflicts of interest. SBF and two colleagues formed the board of directors, without an institutional investor to counterbalance the visionary entrepreneur.

Above all, the criminal attempt to save the company by embezzling customer accounts, a risk that would have been eliminated with the custody of the securities by an independent institution.

Faced with this failure, Chanpeng Zhao (known by its acronym CZ) is committed to greater transparency in the composition of the balance sheet and offers a fund to rescue platforms in liquidity crisis.

Ironically, SBF was the “good guy” who engaged with US regulators and legislators and supported oversight of light industry. CZ, the “bad boy,” strongly objected and argued with regulators. Binance is not licensed in Canada nor is FTX licensed.

CZ, a Chinese-Canadian living in Dubai, took down the Binance headquarters to evade authorities. Today, this libertarian says he is open to regulation and promises careful management of the world’s largest crypto platform. To have.

The ball is now in the court of regulators who must take up the challenge of international coordination. How to frame a stateless industry that can easily operate on the internet from a complacent jurisdiction?

It is to be expected that investors will insist on trading on platforms supervised by competent authorities in the future. Otherwise, the current crypto winter could turn into an ice age.

#FTX #Crypto #Fiasco

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