The collapse of FTX, one of the largest cryptocurrency exchanges in the world, has triggered a new bout of volatility in the highly speculative digital asset market. FTX founder Sam Bankman-Fried’s fortune went from nearly $16 billion to zero in days as his crypto empire filed for bankruptcy protection in the United States on November 11. Here we answer some of your questions about the story so far.
How was FTX structured and what was its business model?
In corporate terms, FTX was a chaotic web of over 100 different companies, all united under the common ownership of Bankman-Fried and his co-founders, Gary Wang and Nishad Singh. In a bankruptcy filing, John Ray III – an American bankruptcy specialist who previously oversaw Enron’s collapse – described it as four main “silos”: a venture capital arm, which invested in d other companies; a hedge fund, which traded crypto for profit; and two exchanges, one supposedly ring-fenced and regulated for the American public, and an international exchange where the rules were much looser.
The sources of income were as diverse as the business, but the heart of the group was exchange. Most people buy cryptocurrency by transferring money (“fiat”) to an exchange like FTX, which operates like a currency exchange, trading currency pairs at a floating exchange rate. FTX’s regulated exchange offered this service, and the company took a cut of every trade, but the big bucks were in trading much more aggressively on the international exchange, where traders tried to take advantage of the price swings of crypto assets. , borrowing money to increase their potential gains (or losses). The more complex the trade, the bigger the cut.
Why did it collapse?
In the short term, because of a token called FTT. It was actually a share of FTX, which the company issued itself and promised to buy back using part of its profits. But leaked documents on the CoinDesk news site suggested Alameda, the group’s hedge fund, was using FTT to make risky loans – in effect trading with corporate certificates. The revelation prompted a major FTT holder, rival exchange Binance, to say it was selling off its holdings, sparking a run on the exchange as other customers rushed to withdraw their funds.
In the medium term, it collapsed due to deeper issues related to the link between FTX and Alameda. The exchange lacked the ability to accept wire transfers, so customers sent money to Alameda and FTX credited their accounts. But the real money never got through: Three years later, Alameda had held, traded, and often lost $8 billion in FTX client funds. When the stock market race started, FTX couldn’t find the money it thought it had because it had never taken it.
In the long run, FTX failed because the business was a mess. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as has happened here,” said Ray, the bankruptcy specialist.
What does the fate of FTX tell us about cryptocurrencies?
Within the sector, different conclusions have been drawn. Some have argued that the collapse is a triumph for “decentralized finance,” or DeFi, which uses computer code to create versions of financial services that don’t rely on trust or a central party. The head of a DeFi exchange cannot buy a $40 million penthouse with client funds because there is no upside.
But outside the sector, the conclusion is clear. Cryptocurrencies are a bet on the idea that a world where government power over money and finance is abolished would be better: the collapse of FTX is perfect proof that in reality government regulations over finance are quite helpful.
Will people get their money back?
Some people will get money back, but no one will get everything. Even Bankman-Fried is convinced that it would take an $8 billion capital injection to make every depositor whole. But the stories presented by Ray make it clear that this is wishful thinking. There isn’t even a single document detailing all of the company’s depositors, he says, and although the balance sheet suggests a healthy mix of assets and liabilities, “I don’t trust him and the information it contains may not be correct at the time of the date indicated.
Robert Frenchman, a partner at New York law firm Mukasey Frenchman, said FTX clients in the United States whose money is trapped in the bankrupt firm will have to join a queue of creditors because there is no There is no special protection for customers of unregistered crypto companies like FTX.
“There is no safety net here for customers in the United States, unlike bank or brokerage account holders. Customers will have to fight with everyone else because they have no special protection. in this process as individual creditors, or as a group of creditors if grouped together, who must battle with legions of other creditors, large and small.
In the meantime, the U.S. Attorney’s Office for the Southern District of New York would look into the case, and U.S. Treasury Secretary Janet Yellen said crypto markets need stronger oversight.
Could there be contagion within the crypto markets?
There have already been signs of a ripple effect. BlockFi, a crypto lender bailed out by FTX this summer, suspended customer withdrawals, admitting it has “significant exposure to FTX.” On Wednesday, crypto exchange Genesis “made the difficult decision to temporarily suspend redemptions” of the company’s lending activity after a series of withdrawals from the service.
This week, the managing director of Singapore-based crypto exchange Crypto.com said his company would prove anyone who said the platform was in trouble wrong, adding that it had a strong balance sheet and was not taking any risk. Kris Marszalek made the statement after investors questioned the transfer of $400 million in ether tokens from Crypto.com to another exchange called Gate.io on October 21. Marszalek said the transfer was a mistake and the ether tokens were returned to the exchange.
Crypto market watchers are expecting more instability, although the basic crypto asset, bitcoin, has been resilient this week remaining broadly flat at around $16,700.
Teunis Brosens, head of regulatory analysis at Dutch bank ING, said the crisis would “surely make” the last crypto winter worse, causing the value of the crypto market to plummet by $3 billion the month before. last year to less than $1 billion now.
“In terms of price, we’ve seen bitcoin pretty stable around $19,000-$20,000 for months. I consider it likely that we are now looking for stability at lower levels – but first the storm has to calm down, and we are certainly not there yet.
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