We may never know just how much Sam Bankman-Fried’s (SBF) crypto empire fell apart, or what collateral damage it would have done to the industry, but we do know the major risks involved. And unfortunately, these are the same problems Bitcoin was created over a decade ago to solve: financial transactions, human hubris, and non-transparent markets.
What just happened: Binance, the world’s largest crypto exchange by volume, agreed to buy a competitor it initially nurtured and then nearly abandoned, FTX. Changpeng “CZ” Zhao, CEO of Binance confirmed the case on Twitter, saying the two exchanges signed a non-binding letter of intent.
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The deal, still subject to due diligence processes and not completed, is an interim measure to save the SBF crypto exchange from insolvency. This will likely calm markets that had been rocked by a public rift between two crypto titans so well known they stick to their initials.
It’s a meteoric fall for SBF – the once-beloved crypto poster boy who plastered his exchange’s name in stadiums and posed for glossy magazines – who just months ago has been touted as the “JP Morgan” of crypto for its efforts to back bankrupt blockchain companies like BlockFi.
“The circle is complete, and the first and last investors of FTX.com are the same: we have reached an agreement on a strategic transaction with Binance for FTX.com (pending DD, etc.)”, Bankman-Fried tweeted Tuesday, using shorthand for “due diligence.”
In line with the full circle motif, it should be noted that SBF has always viewed blockchain more as a means to an end. He got into crypto after a few years as a Jane Street quant, with the stated goal of making as much money as possible to gain as much influence as possible. It would be a nice mentality in crypto if SBF had an apparent love for the tools and protocols that made it rich.
Instead, SBF, a political mega-donor that spent $50 million during the last U.S. election cycle, used its influence to push for regulations that ruffled its clients and competitors. He was a strong supporter of the ACCPD bill that would create a brokerage-like licensing system for decentralized finance and opposed financial privacy.
That’s what he said in public. For CZ, the biggest concern was what was being said behind closed doors, “[W]We will not support people who lobby other industry players behind their backs,” the Binance CEO tweeted over the weekend. It was CZ’s attempt to be “transparent,” he said, explaining a large transaction of over $500 million in FTT tokens to Binance made the previous day.
He announced that Binance would sell these tokens on the open market and drew an ominous comparison to LUNA, another project that Binance backed early on and then collapsed after a bank run. CZ was seizing the moment caused by market uncertainty, after financial data from Alameda Research was leaked to CoinDesk.
The links between FTX and its sister company, hedge fund Alameda, have always been unclear beyond the fact that both were founded by SBF. The disclosed financial statement showed that the majority of Alameda’s assets were illiquid or locked altcoins – many of which SBF had a stake in, including FTT, SOL, and SRM (the token of the co-founded decentralized exchange Serum Bankman-Fried).
Read more: Solana Falls and FTX Link Speculation Centers Sam Bankman-Fried, Alameda
“Alameda will never be able to cash in on a significant chunk of FTT to pay off debt,” said Mike Burgersburg, independent market analyst for Dirty Bubble Media, who first called out the Terra/LUNA meltdown.
Bank runs can be self-fulfilling prophecies. Although several analysts said it was unlikely that FTX or Alameda would face a margin call, investors began draw fundsfeared their capital would be locked in bankruptcy proceedings like with neobanks Celsius and Voyager Digital.
Bankman-Fried and Alameda CEO Caroline Ellison did what they could to calm investors’ nerves, offering to dampen a strong FTT selloff by offering CZ $22 per token. Ellison said the leaked financial document did not represent an additional $10 billion that Alameda would have, while SBF said client funds were “safe” and never re-mortgaged into further crypto transactions.
On-chain analyzes showed a more disturbing story. Stablecoins and other assets flowed from FTX. Prior to Binance’s takeover announcement today, traders had pulled all FTX bitcoin from the platform, according to Coinglass. Alameda was releasing funds from various DeFi platforms to send ETH to FTX, seemingly indifferent to the high withdrawal fees.
FTX users began tweeting about delays in transferring funds from the platform, while BitDAO demanded proof from Alameda that it still held the 100 million BIT tokens acquired by the trading company last November. , and started voting to offload the 3.36 million FTT tokens that BitDAO earned in this deal.
Throughout this process, industry commentators have chastised SBF for the exchange’s lack of transparency and called on it to show proof of reserves for FTX and Alameda. “That’s not much to ask, critics note, given SBF’s recent demagoguery over the need for more regulation and better governance in the crypto arena,” wrote Jeff John Roberts. of Fortune.
Yesterday it became clear that Binance was going dismiss SBF offers to sell its FTT tokens over-the-counter to minimize the sale. Instead, he would hold those assets — the fruit of what CZ called a “divorce” — like a sword of Damocles. Bellwether assets like BTC and ETH, trading sideways yesterday, began to slide in trading overnight.
It was clear that the contagion would be severe if the SBF empire fell. Crypto is tied in intricate knots, and once it unravels, the whole ecosystem can come crashing down – like after the collapse of hedge fund Three Arrows Capital. A stablecoin called Magic Internet Money (MIM), capitalized primarily with FTT, has lost its peg to the dollar.
See also: Binance CEO Zhao Plans to Buy Banks: Report
At least with open financial systems like the MIM, investors knew at what price they would be liquidated. FTX is a black box, and people only have the information that SBF chooses to reveal. Many began to read Bankman-Fried’s retweets of unconfirmed airdrops for FTX users who kept their capital on the exchange as signs of desperation.
“[R]Whichever way it ends, it’s another blow to the industry (and financial institutions in general) simply for a lack of willful transparency, but it’s another giant check mark for data transparency. of the blockchain and skilled researchers trained to discover, read and interpret that data,” said Jeff Dorman, chief investment officer of crypto hedge fund Arca.
And so, we’re back to the beginning. It shouldn’t be a relief that SBF and CZ were apparently able to get along. It’s just another backroom deal.
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