How the FTX empire collapsed

In 2022, we witnessed a new Mt. Gox incident.

FTX, the world's second-largest cryptocurrency exchange, plummeted from peak to trough in just 48 hours.

What exactly happened?

Background introduction: Related roles

FTX was founded by Sam Bankman-Fried (SBF) in April 2019. During the 2021 bull run, FTX rose to become the world's second largest exchange, surpassing early established competitors such as Gemini, Coinbase, and Kraken.

As early as November 2017, SBF established the hedge fund Alameda Research. Although FTX and Alameda are not officially part of the same corporate entity, they are actually unofficial affiliates. The latter is a large market maker for FTX and holds a large amount of FTT on its balance sheet.

FTT is FTX’s pseudo-equity token, which is often associated with the value of crypto exchanges. If you trade on FTX, FTT will give you discounts on trading fees, commissions, and other rewards, similar to Binance’s BNB token.

After the crypto banks collapsed in July 2022, FTX consolidated its dominance, gained widespread recognition, and made offers of assistance to entities such as Voyager, Celsius, and BlockFi. Meanwhile, SBF has become a veritable media darling.

Wednesday, November 2: CoinDesk looks to enter the market

The timeline of this article is based on Singapore Standard Time.

The tumultuous saga began on Nov. 2, when CoinDesk published details of a “private document” dated June 30 that showed Alameda’s balance sheet was crammed with FTT.

According to CoinDesk, $5.8 billion of Alameda’s $14.6 billion in total assets are illiquid FTT collateral, and its market value is only $3.35 billion, which is a very dangerous signal. A worrying situation may occur because if Alameda tries to sell FTT for liquidity, the price of FTT will drop sharply. In short, Alameda is using FTT as collateral to support their loans.

This also indicates that there is a large-scale commingling of assets between FTX and Alameda, and confirms long-standing concerns in the industry that there is a conflict of interest between the two entities.

Sunday, November 6: Alameda does PR, CZ joins the fight

By Nov. 6, rumors were so pervasive that Alameda CEO Caroline Ellison stepped forward to try to calm industry concerns about the fund’s solvency, tweeting that there was more than $10 billion in assets not reflected in the CoinDesk report.

Just one hour later, Binance CEO CZ announced the liquidation of $2.1 billion worth of FTT. Binance received a large amount of FTT last year after withdrawing from FTX as a shareholder. The wording of the tweet was full of diplomatic rhetoric, making Binance look like it was just conducting business "responsibly" as usual. However, the timing and publicity of the announcement only added fuel to the fire, intensifying the rumors and exacerbating investors' concerns.

Monday, November 7: The farce begins

Ellison responded almost immediately on Twitter, publicly offering to buy FTT from CZ for $22. At the time, the price of FTT was still between $23-25.

CZ refused.

Just in case anyone doubted himself, CZ disclosed another wallet transaction from an automated Twitter bot, announcing $23 million (about $580 million) in FTT. This caused the price of FTT to plummet by 15%.

Is CZ “attacking” its arch-rival? No, CZ claims, it’s just Binance doing standard “post-exit risk management, learn from LUNA.” It’s just that the tone of the next tweet is very different from the previous one.

By referring to “LUNA”, FTT cannot avoid being compared to the Terra coin that is now being condemned by everyone.

CZ also made a veiled threat to FTX, saying that “we will not continue to pretend to love each other after we separate” and “we will not support those who lobby against other industry players behind the scenes,” referring to SBF’s active lobbying of cryptocurrency to US regulators.

At this point, any sane investor must take these rumors seriously, even if they were previously unmoved. FTX users are withdrawing funds in droves, as evidenced by the massive outflow of stablecoins from the exchange, with $451 million flowing out in the past seven days.

Institutional traders followed suit. Meanwhile, on-chain wallet activity shows that FTX received about $321 million in stablecoins from Alameda, likely to support user withdrawals.

At the time, SBF attempted to calm the market with a now-deleted tweet:

A competitor is trying to use false rumors against us. FTX is fine. Assets are fine. FTX has more than enough to cover all customer holdings. We do not invest customer assets (even in Treasuries). We have been processing all withdrawals and will continue to do so... We are strictly regulated, even if it slows us down. We are GAAP audited and have a cash surplus of more than $1 billion. We have a long history of protecting customer assets and still do today. CZ, I would love to work with you to build the ecosystem together.

Tuesday, November 8: Users suffer

By Tuesday, the price of FTT had fallen sharply, far below the $22 proposed by Alameda CEO Caroline, falling to about $15. If Alameda's balance sheet is as CoinDesk claims, then due to the large holdings of FTT, it is almost certain that the fund is now insolvent.

At this time, there was complete silence inside FTX.

If you have funds stuck on FTX, you’re definitely sweating right now. If you don’t, then the Crypto Twitter meme machine is churning out memes.

Wednesday, November 9: FTX surrenders

After more than 30 hours of online silence, SBF reappeared and seemed to be surrendering.

The Information reported that SBF "sent a message that he never thought he would send." He asked CZ for help. As expected, SBF announced the next day that Binance had agreed to acquire them and guaranteed that customers would be protected and all assets would be paid 1:1.

Just 6 minutes later, CZ confirmed that they were providing assistance to FTX and signed a non-binding letter of intent (LOI) to support FTX in dealing with the liquidity crisis. This means that Binance can acquire FTX, but can also withdraw from the transaction at any time.

An article in Semafor stated that just hours before the deal was reached, FTX had sought $1 billion in assistance from TradFi.

Hours later, former Alameda CEO Sam Trabucco raised the white flag.

Happy Moment

In the crypto space, when there is a storm, there are always familiar faces. In the UpOnly live broadcast, Do Kwon appeared with Martin Shkreli, who reminded people that "prison is not that bad."

Do Kwon was teased as a fugitive during the live broadcast, and he turned to Twitter again.

Su Zhu did not join the live broadcast, but he posted his first tweet since July.

Impact and unanswered questions

That’s a lot of information, but what can we learn from it?

Will the impact of this incident spread beyond Alameda and FTX themselves?

VC firms like Multicoin Capital and Galaxy Digital have reportedly been affected by the FTX incident, with the latter revealing “$76.8 million in FTX exposure, of which $47.5 million is currently in the process of being exited.”

Are there major legal issues with FTX transferring customer deposits to Alameda?

FTX’s legal and compliance teams have reportedly announced their exit.

SBF is a major investor in SOL and upcoming L1 projects such as Aptos and Sui. What broad impact will this incident have on these L1s and DeFi?

Should we be worried that Binance has formed a monopoly in the crypto world?

Binance not only has a more solid position as the largest cryptocurrency exchange, it also issues the third-largest stablecoin, BUSD, and operates the L1 chain with the second-largest total locked value (TVL).

But perhaps most importantly, what impact will this have on regulation?

According to Bloomberg, regulators have already begun taking action against FTX. Messari’s Ryan Selkis, who made a brief appearance on Bankless’ livestream, added that this could be a fatal blow to the DCCPA legislation bill that FTX is supporting. On the regulatory front, the crypto space could be facing a major shift as regulators are sure to step up their scrutiny.

Coinbase CEO Brian Armstrong also joined the live broadcast and confirmed this view, predicting that this fiasco will accelerate Washington's suspicion of cryptocurrencies. For Armstrong, the biggest setback in the domestic US market is the lack of regulatory clarity, which forces a lot of cryptocurrency trading to be conducted overseas. Armstrong even admitted that there is a lot to admire about SBF's regulatory strategy.

The story is moving, just like the ups and downs of cryptocurrency prices this week, but don’t worry, we’ll be tracking all the latest.

Finally, let’s take a look at this open letter from CZ:

Dear Binancians,

In light of what has happened over the past few days, I would like to reiterate the following points.

First, we did not plan this and we have nothing to do with it. SBF called me less than 24 hours ago. Before that, I knew very little about the internal situation of FTX. I could guess their revenue based on our revenue, but it would never be accurate. I was surprised when he said he wanted to talk to me. My first reaction was that he wanted to do OTC trading...but now it's like this.

Second, as due diligence on the transaction is still ongoing, I want to remind everyone: do not trade FTT tokens. If you have a bag, as long as you don't buy or sell, you still have a bag. As soon as I ended the call with SBF yesterday, I asked our team to stop sales at the organization level. Yes, we have a bag. But it doesn't matter. More importantly, we need to hold ourselves to a higher standard than banks.

Third, of course, do not comment publicly or internally on this transaction. If you are not directly involved in it, do not ask questions. We have a great team working on this. It will be resolved soon.

Fourth, the decline of FTX is not good for anyone in the industry. Don't think of this as "our win." User confidence has been severely dampened. Regulators will conduct stricter scrutiny of exchanges. Licenses will be harder to obtain worldwide. People now think we are the biggest and will attack us more. But it doesn't matter, we are used to being open and inclusive and going against the wind. In fact, we accept and embrace scrutiny. We must significantly improve transparency, proof of reserves, insurance funds, etc. There will be more achievements in this field. We have a lot of difficult work to do. Not to mention the wild price fluctuations.

Fifth, speaking of price. As I have said many times over the years, forget about price. Let's keep our heads down and focus on building products that people use. That has worked well for many years and it clearly works well now.

Finally, I want to say that I am really proud of each and every one of you, for all your hard work and your teamwork. Thank you! We still face many challenges, let us continue to move forward and contribute to the continued and stable promotion of monetary freedom around the world.