Crypto is still the wild West. Ash Bennington from Real Vision has referred to the industry as one big science experiment.
Earlier this year we saw the collapse of Terra, Voyager, Celsius and BlockFi. Next up, the collapse of FTX Global.
Many customers lost their life savings overnight in the form of token price collapses, or bail-ins. A bail-in is when customer assets are frozen and seized by the exchange.
What is FTX exchange
According to FTX.com, “FTX is a cryptocurrency exchange built by traders, for traders. FTX offers innovative products including industry-first derivatives, options, volatility products and leveraged tokens. We strive to develop a platform robust enough for professional trading firms and intuitive enough for first-time users.”
What’s important to consider here is the fact that FTX.com was an unregulated exchange. What was going on behind the scenes was unknown. This allowed the exchange to lend out customer funds, which only banks are allowed to do in the U.S. The industry term for this is, leveraging liquidity.
FTX is available in the U.S. through its subsidiary, FTX.us, which is subject to regulators and separate from this discussion for now. In his Twitter feed this morning, founder Sam Bankman-Fried assures the public that FTX.us is safe. We’ll see.
Does FTX exchange have a coin?
Yes it does. Fees on FTX.com were paid using the FTT token. U.S. regulators consider the FTT token to be a security, therefore U.S. citizens were prohibited from owning it.
Score one for regulators, because the FTT token is down around 90% in just the last few days.
FTX liquidity crisis
Sam Bankman-Fried (SBF) was a professional trader for Jane Street Capital Management prior to founding his own trading firm, Alameda Research. Alameda’s largest holding was the FTT token.
Much has yet to be uncovered, but it looks like Alameda lent funds to 3 Arrows Capital, which collapsed in June, 2022. Then, FTX.com used customer funds to make Alameda appear to be solvent.
According to Real Vision founder, Raoul Pal, “Alameda went bust when everyone else went bust.” Referring to Voyager and BlockFi.
The FTX exchange leverage was too great to come back from. They borrowed too much and as Alameda’s bets lost value the only thing they could do was sell the FTT token.
During this time Sam Bankman-Fried went on a political spending binge. He contributed over $40 million to democratic candidates and super PACs.
Politico sites SBF as saying, ““Every day that we don’t get anything done on the crypto policy side, simultaneously, customers are not protected,” Bankman-Fried said in an October interview. “There is no preemptive cop on the beat. And also 95 percent of the industry is offshore because there are no clear guardrails in the United States.”
Now it’s coming out that industry insiders never trusted SBF, but because of his wealth and influence were afraid to say so.
It appears that his lobbying was self-serving and not what was best for the crypto community at large, because he was trying to get decentralized finance regulated out of existence.
Binance to acquire FTX
Interestingly, Sam Bankman-Fried went to his rival and Twitter enemy, Changpeng “CZ” Zhao. CZ is CEO of Binance and actually funded FTX initially. It appeared that CZ would be the first and last investor in FTX.
Binance received $2.1 billion in BUSD stable coin and FTT tokens for their investment in FTX.
But, on November 7th, 2022 CZ and Binance instead announced that they were going to sell their FTT token holdings. Read more on Binance.com.
Just 2 days later, on November 9, 2022 Binance withdrew it’s offer to bail out FTX. The $8 billion hole in FTX’s balance sheet was too large. The FTX website said: “FTX is currently unable to process withdrawals. We strongly advise against depositing.”
The news sent the crypto markets tumbling. Bitcoin went as low as $15,742 and Ethereum dropped down to $1095.
FTX crash and FTX collapse became top Google searches.
Binance is now calling for regulation and setup an industry recovery fund.
Tom Brady and FTX
Football quarterback, Tom Brady and soon-to-be x-wife, Gisele Bündchen invested heavily in FTX. According to the New York Post, “Brady was a brand ambassador and appeared in commercials for the crypto exchange. Bündchen was named the company’s Environmental & Social Initiatives Advisor.”
Their loss is estimated to be in the hundreds of millions of dollars.
The Post also reports, “Brady and Bündchen are not the only figures in the sports world who could be affected by the FTX collapse. FTX is a big sponsor of MLB and is the naming rights holder for the Miami Heat arena. Steph Curry and Shohei Ohtani also have had public partnerships with FTX.”
The reach of the FTX insolvency is yet to be seen.
Sam Bankman-Fried’s net worth is said to have fallen from over $16 billion with a B, to just over $1 billion. He has issued a public apology on Twitter.
FTX filed for chapter 11 bankruptcy on November 11, 2022. Unfortunately, this filing surprised everyone by including FTX.us, which Sam Bankman-Fried said was safe in a tweet the day before.
Crypto execs ask for clearer regulation
Here’s where we stand now. According to a report from Coindesk the CEOs of Coinbase, Ripple and Circle are calling for clear regulation.
What concerns us at Blocks United is that all of crypto will be penalized by overregulation. And that decentralized finance will be blamed for the actions of centralized finance.
In decentralized finance everything is on-chain and transparent. It was created because of the opacity and greed of traditional financial actors, like Lehman Brothers and Bear Stearns in 2008.
Voyager, Celsius, BlockFi and FTX are all centralized actors. They are corporations that used blockchain technology and crypto to deceive customers and investors. Had all their activities been on-chain, perhaps all of this could’ve been avoided.
Watch Glassnode’s video below for an excellent on-chain analysis.
We believe in sensible regulation. If crypto is to gain mass adoption, people must be protected.
However, it’s become clear that SEC chairman, Gary Gensler is an enemy of crypto. It can even be argued that the SEC’s inability to step in and regulate centralized crypto lenders are to blame.
No matter what the regulators decide, we believe in self-custody of crypto assets. Use a Ledger hardware wallet and store your keys offline.
Crypto keys held offline allow us to cross borders without centralized oversight. We now have the ability to be truly self-sovereign.
We fear overregulation is on the way and what’s legal today may be considered illegal tomorrow. This is one reason we’re huge fans of encrypted networks, like Secret Network.
This is why we’re huge fans of decentralized projects, like the Cosmos Hub. It’s controlled by the community at large, not a VC firm.
Stake Cosmos ATOM tokens using Keplr wallet. Click the button below. Then scroll down the list of active validators to find Blocks United.
No matter what happens, blockchain and Web3 are here to stay. No regulation can stop it and the average person can finally control their financial destiny.
We’d love to hear what you think. Reach out to us through email or any of our social channels. They’re located at the bottom of our homepage.
Nothing we say is financial advice or a recommendation to buy or sell anything. Cryptocurrency is a highly speculative asset class. Staking crypto tokens carries additional risks, including but not limited to smart-contract exploitation, poor validator performance or slashing, token price volatility, loss or theft, lockup periods, and illiquidity. Past performance is not indicative of future results. Never invest more than you can afford to lose. Additionally, the information contained in our articles, social media posts, emails, and on our website is not intended as, and shall not be understood or construed as financial advice. We are not attorneys, accountants, or financial advisors, nor are we holding ourselves out to be. The information contained in our articles, social media posts, emails, and on our website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation. We have done our best to ensure that the information provided in our articles, social media posts, emails, and the resources on our website are accurate and provide valuable information. Regardless of anything to the contrary, nothing available in our articles, social media posts, website, or emails should be understood as a recommendation to buy or sell anything and make any investment or financial decisions without consulting with a financial professional to address your particular situation. Blocks United expressly recommends that you seek advice from a professional. Neither Blocks United nor any of its employees or owners shall be held liable or responsible for any errors or omissions in our articles, in our social media posts, in our emails, or on our website, or for any damage or financial losses you may suffer. The decisions you make belong to you and you only, so always Do Your Own Research.
