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A near-total wipeout of the FTX Token leaves CEO Sam Bankman-Fried shopping for a bailout. Arch-rival Binance steps in to take over, but then backs out due to potential enforcement activity by US regulators.
The week in crypto was dominated by a single, major story: the shock admission that FTX, one of the world’s largest exchanges and self-styled lender of last resort to the industry, could be facing insolvency.
After spending much of 2022 bailing out distressed crypto firms such as BlockFi and Voyager Digital, this week it was the turn of Sam Bankman-Fried, the billionaire founder and CEO of FTX, to issue a distress signal of his own.
In September, as reported by VIXIO, bankrupt crypto lender Celsius was accused by a US regulator of having been insolvent since 2019, but of covering it up by issuing ever larger amounts of CEL, its own token, and claiming it as an asset on the balance sheet.
Similarly, FTX’s current liquidity issues can be traced back to an exposé of FTX Token (FTT), an FTX-issued crypto-asset that can be traded or used to access discounts on fees or other privileges.
Last Wednesday (November 2), CoinDesk published a review of a “private document” that purported to show a balance sheet of Alameda Research, the crypto trading firm owned by Bankman-Fried.
Officially, FTX and Alameda are separate business entities, but as CoinDesk discovered, their finances appear to be significantly commingled via the FTT token.
As of June 30, Alameda’s total assets were worth $14.6bn, and its single-biggest asset was described as “unlocked FTT” tokens worth $3.6bn.
More significantly, Alameda’s third-biggest asset was described as “FTT collateral” worth $2.6bn.
In other words, over a third of the assets on the balance sheet were made up of self-issued loyalty tokens that FTX can print out of thin air, and a large portion of those tokens had then been leveraged to borrow more capital from other sources.
The authenticity of the balance sheet was confirmed by Alameda CEO Caroline Ellison, who said that although its numbers are correct, it was only meant for a “subset” of Alameda’s corporate entities and did not reflect the company’s total assets.
Gradually, and then suddenly
At first, the publication of CoinDesk’s report had little impact on the price of the FTT token.
However, as the weekend approached, sentiment turned negative, and a sharp sell-off took place through Saturday and Sunday.
Then on Sunday evening, Binance CEO Changpeng Zhao staged a highly public intervention, announcing on Twitter that he plans to liquidate Binance’s entire holding of FTT tokens.
“Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books,” he said.
Last year, according to Zhao, Binance converted $2.1bn of FTX equity into a mixture of FTT tokens and US dollar stablecoins, though he did not say exactly how much of each one.
He added that the liquidation could take “a few months” to complete due to limited liquidity, and that Binance would strive to “minimise” the market impact of the liquidation.
However, despite these assurances, Zhao’s tweet had already initiated a cascade of heavy selling.
By Tuesday the FTT token had lost over 95 percent of its value, with its market cap dropping from about $3.4bn to just a few hundred million dollars.
This also took place in spite of an offer from Ellison to buy all of Binance’s FTT tokens for a fixed price slightly below market value.
Zhao declined the offer, but insisted that there was no malice in his opting to liquidate.
“Binance always encourages collaboration between industry players,” he said. “Regarding any speculation as to whether this is a move against a competitor, it is not.
“Our industry is in its nascency, and every time a project publicly fails it hurts every user and every platform.”
FTX suspends withdrawals
What began as a sell-off in FTT and other FTX-linked tokens, such as Solana, quickly spread to the entire crypto market, including majors such as bitcoin and ethereum.
Panic spread among FTX users, who rushed to withdraw their money from the exchange. On Tuesday (November 8), this led FTX to suspend all withdrawals citing liquidity issues (an order that remains in place at the time of writing).
On the same day, Bankman-Fried reached out to the most unlikely of contacts — the man who appeared to have just crashed the FTT token — in search of a bailout.
“This afternoon, FTX asked for our help, as there is a significant liquidity crunch,” Zhao wrote on Twitter.
“To protect users, we signed a non-binding letter of intent (LOI), intending to fully acquire FTX.com and help cover the liquidity crunch. We will be conducting full due diligence in the coming days.”
In response, Bankman-Fried thanked Zhao by saying the deal would help FTX to clear the withdrawal backlog as quickly as possible and ensure that customer assets are protected.
“I know that there have been rumours in the media of conflict between our two exchanges,” Bankman-Fried said on Twitter.
“However, Binance has shown time and again that they are committed to a more decentralized global economy, while working to improve industry relations with regulators. We are in the best of hands.”
In the meantime, Zhao revealed why he took the decision to axe the FTT token from Binance's books.
“Two big lessons,” he said. “1: Never use a token you created as collateral; 2: Don’t borrow if you run a crypto business.”
He added that Binance has never used its own token, BNB, as collateral, and has also never taken on any debt to finance its operations.
“Liquidating our FTT is just post-exit risk management, learning from LUNA,” he said, referring to the algorithmic stablecoin that collapsed in May this year, and to which every major crypto player had some exposure.
“We gave support before, but we won't pretend to make love after divorce,” he added, cryptically. “We are not against anyone, but we won't support people who lobby against other industry players behind their backs. Onwards.”
The deal is off
On Thursday (November 10), a report from Bloomberg dashed Bankman-Fried’s hopes of a quick rescue for FTX.
Quoting a person familiar with the matter, Bloomberg’s report said that officials from the US Department of Justice (DOJ) are working with attorneys at the Securities and Exchange Commission (SEC) to determine whether FTX has mishandled customer funds.
As soon as the Bloomberg story was published, Binance withdrew its interest in an acquisition bid.
“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” Binance said in a statement.
“We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market.”
The bigger picture
At this stage it remains unclear what will become of FTX. Even if its liquidity problems were fixed and withdrawals resumed, FTX will be facing a loss of trust that will be difficult — if not impossible — to recover from.
However, throughout the crisis, Bankman-Fried has insisted that FTX may be temporarily illiquid but it is not insolvent. On Thursday (November 10), he added that Alameda would start “winding down” its trading activities.
Bankman-Fried also referred — again, cryptically — to another industry player that may have had some role in bringing the balance sheet story to light and sowing doubt around the FTT token.
“At some point I might have more to say about a particular sparring partner, so to speak,” he wrote on Twitter, as part of a long mea culpa thread.
“But you know, glass houses. So for now, all I'll say is: well played; you won.”
This week’s events highlight how the crypto industry is never too far away from its next crisis, from which there are few winners.
As Zhao reflected in an internal Binance note: “Do not view it as a win for us. User confidence is severely shaken. Regulators will scrutinise exchanges even more. Licences around the globe will be harder to get.”
