The story of Sam Bankman-Fried and his nearly bankrupt crypto exchange FTX now seems more for Broadway or Netflix than for Wall Street. The Rise and Fall of a Crypto Billionaire. Starring Sam Bankman-Fried himself, SBF in crypto circles, as the hero who tried to help others but fell. Competitor Changpeng Zhao, owner of competitor Binance, as a villain who – according to SBF – has always been out to destroy FTX. And with an angry mob demanding their money back, it was like a 1930s bank run.
1. What was FTX?
FTX is – or soon was – an important digital platform on which consumers can invest in cryptocurrencies. Bitcoin is the most well-known crypto currency, but there are many more such initiatives. Incidentally, the term coin is confusing; According to De Nederlandsche Bank, a ‘crypto’ is more an investment product, a very risky investment, than a means of payment. FTX has been around since 2019. The crypto exchange was founded by the young American Sam Bankman-Fried (30), the son of two law professors at Stanford University. SBF worked for some time as an investment advisor, specialized in crypto and started his trading house Alameda Research in 2017. Two years later, FTX followed. For example, Bankman-Fried owns both the marketplace and a stall in that market.
SBF managed to attract nearly 90 investors in four years, according to a list by Reuters news agency. Large funds such as SoftBank, Sequoia Capital and BlackRock are investing in FTX, as well as the pension fund of Canadian teachers in Ontario and the famous American football player Tom Brady and his wife, top model Gisele Bundchen. The latest investment round, in January 2022, valued FTX at a total of $32 billion (€31 billion).
FTX is far from the only marketplace where digital investors can trade cryptos via their PC or mobile phone. According to Reuters, 4 to 9 percent of trading took place monthly this year through FTX. Binance, owned by Chinese-Canadian crypto billionaire Changpeng Zhao, is the main competitor. That platform has seen its share grow to 62 percent of the trading volume in recent months.
Investors in FTX: from Canadian pension fund to Gisele Bundchen
The investments and popularity of crypto made twenty-something, now thirty-something Sam Bankman-Fried a billionaire. SBF appeared on the covers of glossy magazines and signed sponsorship deals with, among others, the American basketball players of the Miami Heat (their home are now called FTX Arena), the Formula 1 drivers of Mercedes and motorcycle racers.
2. What happened?
That was the turnout. Now the downfall.
It started in May and June, insiders told Reuters news agency on Friday. Bankman-Fried’s trading house Alameda Research suffered significant losses on some deals at the time. These were related to the spectacular crash of the so-called ‘stable’ cryptocurrency TerrasUSD in May.
Bankman-Fried emerged as the great savior of smaller crypto companies like BlockFi and Voyager Digital. They would otherwise be pulled into TerraUSD’s fall. SBF lent them millions, but saddled its own Alameda Research with large shortages.
Bankman-Fried is said to have pumped up Alameda’s balance sheet with $4 billion from its own crypto exchange FTX. Unbeknownst to other FTX executives, it is said. According to Reuters, part would have been credits from customers. That is highly unusual in the (traditional) financial world. On November 2, a crypto sector website, CoinDesk, published a story about the major financial interdependence between crypto exchange FTX and trading house Alameda Research, which was also largely based on the value of FTX’s own cryptocurrency, FTT. If it fell, the air would drain from under both companies.
Read also‘This is exactly what happened during the credit crisis,’ says ING expert about crypto crash FTX
SBF’s colleague Caroline Ellison, CEO of Alameda, last weekend tried to allay doubts about the financial health of the two companies by downplaying the publication’s significance. But the damage was already done. In a panic, FTX customers withdrew a total of $5 billion from the exchange on Sunday.
FTX did have other cryptocurrencies on its balance sheet. But when FTX and trading house Alameda wanted to monetize them to pay out customers, the price of almost all cryptocurrencies plummeted. As a result, the liquidity gap widened even further. To meet all customer claims, FTX would need an additional $8 billion.
Bankman-Fried turned to the man who had helped him start FTX in 2019 but had come to see him more and more as a major competitor, Changpeng Zhao.
CZ is the wealthy founder and owner of the major crypto platform Binance. Zhao said he wanted to help. He offered to take over FTX on Tuesday, but pulled out not much later. CZ reported that he had doubts about FTX’s financial health and would have shied away from the possible investigations by US stock market regulators into the possible maladministration of client assets. Zhao’s judgment was fatal to FTX. Bankman-Fried suspects foul play. Binance has now lost a competitor. In one of his ‘excuse tweets’ he writes: ‘There will come a time when I could say more about a certain ‘sparring partner’. For now I just say: well played, you won.”
3. This looks like a classic bank run?
Yes, take the bank run that rocked the American banking system in the Great Depression. Tens of thousands of customers gathered in front of the branch of the Bank of the United States in New York’s Bronx on December 10, 1930. Panic! They all wanted their money back.
The bank, one of the largest in the city, was in serious trouble. A merger with three other banks had failed because they had doubts about the financial health of the Bank of the United States. Other competing banks refused to help; after the bank crash of 1929, they also had little fat on their bones. The Bank of the United States was forced to close permanently a few days later.
The similarities with the impending fall of the crypto exchange FTX and the related trading house in digital investment products Alameda Research are striking. A failed merger, uncertainty about finances, panicked customers who risk losing their money.
It remains to be seen whether the impending demise of FTX, one of the largest cryptocurrency trading platforms in the world, will also have an effect on the crypto system as the bank run on the Bank of the United States. After the stampede of angry savers in the 1930s, global supervision of the banking system emerged.
4. And what’s going to happen with FTX now?
On Friday it was announced that the major American crypto exchange FTX has requested a postponement of payment in the US. FTX officially applied for bankruptcy protection in a so-called Chapter 11 procedure. In this way FTX – and the related trading house Alameda Research – can reach an agreement with the creditors in relative peace. Or decide that it is finally over for the company.
In any case, Bankman-Fried (30), the young founder and owner of both crypto companies, is leaving the field. The billionaire is leaving both companies. Friday he posted a long apology on Twitter for the whole “shit show”. „I fucked up, and should have done better. [Ik heb het verneukt, en had het beter moeten doen.]”
5. And with the rest of the (crypto) world?
The question is whether, in the wake of FTX, other crypto companies will also find themselves in trouble. Earlier this year, that also happened when TerraUSD imploded – in fact FTX is still indirectly the victim of that. Binance founder CZ has according to the Financial Times said that an analogy with the credit crisis in 2008 and 2009, when several financial institutions collapsed after the collapse of investment bank Lehman Brothers, is not very surprising.
It is not very likely that there will be major casualties in the ‘real’ financial world. FTX had indeed received money from several large investors, such as the Japanese Softbank and the American venture capitalist Sequioa: 100 and 210 million dollars respectively. But that’s not a lot of money for those parties. Sequoia has written down the amount in the books.
Whether customers of FTX and Alameda who did not request their credits on time, will see anything back from that money is also a question. There were rumors of a payout in other cryptocurrencies backed by competitors, with customers taking a loss. Whether this will happen and how will be part of the settlement of the bankruptcy.
What is certain is that regulators will make stricter rules for crypto companies. They were in the making. In the European Union, for example, the Markets in Crypto Assets Regulation (MiCAR) will come into effect in the coming years. Crypto companies must apply for a license under those rules and comply with all kinds of rules regarding transparency and liquidity.
A version of this article also appeared in the newspaper of November 12, 2022