The FTX saga seen by a person that educates herself on crypto matters
As I have been involved a lot in covering and understanding the crypto world, I couldn’t let the FTX case just go by without giving it a thought – FTX is on the brink of collapse … I started by doing a bit of research, thinking, and writing. Here it goes (feedback and perspectives are more than welcomed ??)
30-year-old, Bankman-Fried set up Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, accumulating a nearly USD 17 billion fortune. However, news of the liquidity crunch at FTX – valued in January at USD 32 billion with investors including SoftBank and BlackRock – sent reverberations through the crypto world.
On the 8th of November, Sam Bankman-Fried, owner of cryptocurrency exchange FTX, caught his employees off-guard with a somber message.
‘I’m sorry’, he told them. ‘I fucked up’.
After Mr. Bankman-Fried founded the firm in 2017, Alameda engaged in arbitrage —buying a coin in one location and selling it elsewhere for more. Another business at Alameda is market-making—offering to buy and sell assets on crypto exchanges throughout the day and collecting a spread between the buying and selling price. Recently Alameda has become one of the biggest players in ‘yield farming’, or investing in tokens that pay interest-rate-like rewards. Yield farming can be risky because the tokens often have an initial run-up in price as investors pile in, seeking the rewards, then a crash as they get out.??
3. But now, FTX needs emergency funding.
The seeds of FTX's downfall were sown months earlier, stemming from mistakes Bankman-Fried made after he stepped in to save other crypto firms as the crypto market collapsed amid rising interest rates. Some of those deals involving Alameda led to a series of losses that eventually became his undoing. On the 10th of November, the Securities Commission of the Bahamas said that it froze the assets of FTX Digital Markets Ltd, the Bahamian subsidiary of FTX. The commission said that it appointed a provisional liquidator and that no assets held by the firm can be transferred without the provisional liquidator’s approval.
4. FTX’s arch-rival, Binance, planned to mount a shock takeover of its main trading platform to save it from a ‘liquidity crunch’. But Binance founder Changpeng Zhao said it decided to pull out of the deal as a result of its due diligence on FTX and news reports about US investigations into the company.
Binance is backing out of its plans to acquire FTX, the company said on the 9th of November, leaving Sam Bankman-Fried’s crypto empire on the verge of collapse. ‘In the beginning, we hoped to be able to support FTX’s customers to provide liquidity’, Binance said in a tweet Wednesday. ‘But the issues are beyond our control or ability to help’.
5. Latest updates - The exchange's Japan and Turkey subsidiaries are slowly allowing customers to withdraw small amounts to their bank accounts. Withdrawals on FTX International remained paused as of Asian hours on the 11th of November.
Food for thought
How to solve the philosophical Crypto trilemma?
This trilemma is made of:
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Customer funds need to be protected.?In Europe MiCA aims to protect consumers against some of the risks associated with an investment in crypto-assets and help them avoid fraudulent schemes. This principle should apply anywhere across the globe.?
Trust, transparency, accountability/ownership are still needed in the crypto (people) world.?Crypto is still an industry dominated by famous people's reactions, tweets, and ‘public apologies’ without thinking over the consequences on end consumers.
Crypto needs to rebuild its credibility.?To cite Simon Taylor –?‘The FTX brand is now toxic, Crypto prices are cratering, and the market is filled with fear. The DeFi crowd says, ‘this is why you need to custody your assets and need truly decentralized finance’, and the TradFi crowd says, ‘this is why we need regulated banks.’
Is it ok to have DeFi based on TradeFi? [Layered Bitcoin] is it more sustainable as a business model and as a measure to protect users??To cite Nik Bhatia, author of Layered Money: ‘with the introduction of large BTC custodians, their customers will not own first layer BTC. Customers will own second-layer BTC because they won’t own BTC private keys; the custodian will. As the saying goes among the Bitcoin community, ‘not your keys, not your coins’. And of course, custodians will be subject to government regulation within their jurisdiction…there is now a wide array of second-layer BTC money types. Some instruments mirror the financial arrangements of today’s traditional financial systems, like deposits … customers with deposits could lend their collateral to other traders at an interest rate.’ If we take this idea in the context of FTX trading activities coupled with Alameda’s activities if traditional financial systems rules and regulations would have applied, how would the situation be?
Let's not throw the baby out with the bathwater?– let’s not over-judge crypto. If for instance let’s say people will start a ‘giant withdrawal surge’ from ING –can the bank cover all funds?
Crypto is at its beginning?– must go through all cycles, good and bad.
Sources:
I bridge tech and business to solve complex problems with the goal to transform firms into digital leaders, optimizing operations, and boosting customer engagement.
2 年This whole episode reminds me a lot of the primary reason for the glasss-steagall act but then also, its repeal with the subsequent 2008 financial crisis - which is ironic if you consider how bitcoin got its start. The point is this: if you hold customer deposits, you have a fiduciary duty. The enforcement of such happens (again) through regulation. The crypto indsutry is not sufficiently regulated and thus these things happen.