crypto strategy

FTX Collapse Sends Shockwaves Through Crypto Industry

Sam Bankman-Fried received plaudits as he quickly rose to superstar status at the helm of cryptocurrency exchange FTX: the savior of crypto, the new force in Democratic politics and potentially the first billionaire in the world.

Now, comments about Bankman-Fried, 30, range from bewilderment to hostility after FTX filed for bankruptcy protection on Friday, leaving its investors and clients feeling cheated and many others in the crypto world fearing the repercussions. Bankman-Fried himself could face civil or criminal charges.

“I’ve known him for several years and what just happened is just shocking,” said Jeremy Allaire, co-founder and CEO of cryptocurrency firm Circle.

Under Bankman-Fried, FTX quickly became the third-largest exchange by volume. The staggering collapse of this fledgling empire has sent tsunami-like waves through the cryptocurrency industry, which has seen a good deal of volatility and turmoil this year, including a sharp drop in the price of Bitcoin. and other digital assets. For some, the events are reminiscent of the domino failures of Wall Street firms during the 2008 financial crisis, especially now that supposedly sound companies like FTX are failing.

A venture capital fund wrote down investments in FTX worth more than $200 million. Cryptocurrency lender BlockFi suspended customer withdrawals on Friday after FTX filed for bankruptcy protection. Singapore-based exchange saw withdrawals spike over the weekend for internal reasons, but some of the action could be attributed to raw nerves at FTX.

“Sam, what did you do?” tweeted Sean Ryan Evans, host of the cryptocurrency podcast Bankless, after the bankruptcy filing.

Bankman-Fried and his company are under investigation by the Department of Justice and the Securities and Exchange Commission. The investigations likely focus on the possibility that the firm used customer deposits to fund bets on Bankman-Fried’s hedge fund Alameda Research, a violation of US securities law.

“This is a direct result of a rogue actor breaking all the basic rules of tax responsibility,” said Patrick Hillman, chief strategy officer at Binance, FTX’s biggest competitor. Early last week, Binance looked set to step in to bail out FTX but backed down after a review of FTX’s books.

The ultimate effect of FTX’s bankruptcy is uncertain, but its failure will likely result in the destruction of billions of dollars of wealth and even more cryptocurrency skepticism at a time when the industry could use a vote of confidence.

“I care because it’s retail investors who are hurting the most, and because too many people still mistakenly associate Bitcoin with the fraudulent ‘crypto’ space,” said Cory Klippsten, CEO of Swan Bitcoin, who for months has raised concerns about FTX’s business model. Klippsten is publicly enthusiastic about Bitcoin, but has long been deeply skeptical of other parts of the crypto universe.

Rapid growth

Bankman-Fried founded FTX in 2019, and the business has grown rapidly – ​​it was recently valued at $32 billion. The son of Stanford University professors, known for playing the “League of Legends” video game at meetings, Bankman-Fried has attracted investment from the highest circles in Silicon Valley.

FTX was founded in 2019 and has grown rapidly to be valued at $32 billion as recently as January [File: Marta Lavandier/AP Photo]

Sequoia Capital, which over the decades has invested in Apple, Cisco, Google, Airbnb and YouTube, described their meeting with Bankman-Fried as “a likely conversation with the world’s first billionaire.” Several Sequoia partners got excited about Bankman-Fried following a Zoom meeting in 2021. After several more meetings, Sequoia decided to invest in the company.

“I don’t know how I know, I know. SBF is a winner,” wrote Adam Fisher, a business journalist who wrote a profile of Bankman-Fried for the company, referring to the FTX CEO by his popular online nickname. The article, published at the end of September, was removed from Sequoia website.

Sequoia reduced its $213 million in investments to zero. A pension fund in Ontario, Canada also reduced its investment to zero.

In a terse statement, the Ontario Teachers’ Pension Fund said, “Understandably, not all investments in this start-up asset class meet expectations.

But until last week, Bankman-Fried was considered a white knight of the industry. Whenever the crypto industry experienced one of its crises, Bankman-Fried was the likely person to fly in with a bailout.

When online trading platform Robinhood was in financial trouble earlier this year — collateral damage from falling stock and crypto prices — Bankman-Fried jumped in to buy a stake in the company as a show of support.

When Bankman-Fried bought the assets of bankrupt crypto firm Voyager Digital for $1.4 billion in September, it brought relief to Voyager account holders, whose assets have been frozen since its own bankruptcy. This rescue is now in question.

FTX’s failure began after cryptocurrency outlet CoinDesk published a story based on a leaked balance sheet from Alameda Research. The story revealed that the relationship between FTX and Alameda Research was deeper and more intertwined than previously known, including FTX lending large amounts of its own tokenized FTT to Alameda to help build up liquidity.

This triggered massive withdrawals from FTX, causing the crypto company to experience a very old financial problem: a bank run.

“FTX created a worthless token out of thin air and used it to make its balance sheet appear stronger than it actually was,” Klippsten said.

Growing influence

As king of crypto, Bankman-Fried’s influence was beginning to spill over into political and popular culture. FTX bought prominent sports sponsors with Formula One Racing and the naming rights to an arena in Miami, and aired Super Bowl commercials featuring “Seinfeld” creator Larry David. He pledged to give $1 billion to Democrats this election cycle — his actual donations were in the tens of millions — and prominent politicians like Bill Clinton were invited to speak at conferences. FTX. Football star Tom Brady has invested in FTX, as has future supermodel Gisele Bündchen.

Bankman-Fried had been the subject of criticism before the collapse of FTX. While largely operating FTX outside US jurisdiction from its headquarters in the Bahamas, Bankman-Fried was increasingly vocal about the need for increased regulation of the cryptocurrency industry. Many crypto proponents oppose government surveillance. Now, the collapse of FTX may have helped make the case for tighter regulation.

One such critic was Binance founder and CEO Changpeng Zhao. The feud between the two billionaires spilled over to Twitter, where Zhao and Bankman-Fried collectively commanded millions of followers. Zhao helped initiate the drawdowns that doomed FTX when he said Binance would sell its holdings in FTX’s FTT crypto token.

“What the *** show…and it will be crypto’s fault (instead of a guy’s fault),” Zhao wrote on Twitter on Saturday.

Zhao has since said that Binance plans to launch a fund to help crypto projects facing a liquidity crunch. The stimulus fund will help “further reduce the negative cascading effects of FTX,” Zhao said in a Tweeter on Monday, targeting projects “otherwise solid, but in crisis of liquidity”.


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