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The FTX Story: Explained

Crypto markets are in a tizzy again and this time the reason is FTX, the world’s second largest crypto exchange platform. From almost becoming the largest rescue deal in the world of crypto between Binance and FTX, the deal being called off, a liquidity crunch, missing billions and FTXs final call to file for bankruptcy — there is a lot that has been going on.

Over the second week of November, global crypto markets tumbled and saw double digit decline as news of a leading exchange platform could be on the brink of bankruptcy made the rounds. On 9th November, Binance which is the world’s largest crypto exchange was set to acquire the platform. However, a day later they walked out of the deal citing problems with FTXs finances and potential regulatory information.

This comes at a time when global financial markets including crypto have been facing choppy times with a looming fear of recession, high interest rates and overall difficult macroeconomic conditions.

So what went wrong?

The FTX story starts with Alameda Research, a platform launched by Sam Bankman-Fried in 2017 to trade crypto to make money. Once the platform became profitable, Sam launched FTX — an exchange platform that offered customers a platform to buy/sell crypto and get loans too. The platform in early 2022 was valued at $32 billion. Soon after they also launched a token called FTT. Holders of FTT were offered special benefits including lower fees and no-cost withdrawals on FTX. Other than that, the three entities were said to be operating separately.

So where is the problem, you ask? It was after FTT faced massive sellout that the platform announced that they were facing a “liquidity crunch” which means that they did not have the required money available to return money back to their customers.

Side note: Binance and FTX have crossed paths before. Changpeng Zhao, one of the owners of Binance was one of the first few investors of FTX. Once FTX became popular and a close competitor, Sam bought out Binance’s stakes in a deal that was worth $2 billion in FTT tokens.

Soon, the connection between the three entities also came out. Alameda Research owned FTT tokens. A piece of news that became public after their balance sheet was leaked online.

CoinDesk , a crypto news media company, reported “As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral. There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)”

What also became public was that Alameda Research owed a lot of money and most of its assets were in FTT money. There were also accusations that customer deposits were used for trading. The combination of events led to panic selling that led to the platform stalling withdrawals. Soon after, the platform declared bankruptcy.

What does it mean for crypto?

Any development in a particular cryptocurrency has an effect on the entire market and that is exactly what we are seeing play out. Over the last week, the global crypto market has seen some of its worst days. Key currencies like Bitcoin are trading at two year lows of $16,000. Most of the cryptocurrencies have faced double digit decline in the last week.

The incidents have also brought forth the need for more policy intervention in the sector so genuine exchanges can continue working in the world of crypto. Such events are only a speed break in the journey.

What is the way ahead?

As developments continue, here is what we know:

  • No one came to bail out FTX. They filed for bankruptcy and will face regulatory consequences
  • The inherent characteristic of a blockchain is that it offers traceability so tracers are at work to see what went wrong

We would have to wait to see how the event plays out.

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