That escalated quickly: FTX’s fall catches the world by surprise

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This week started with Sam Bankman-Fried – a crypto entrepreneur better known as SBF – as a billionaire, 15 times over. It will end with both his projects, FTX and Alameda Research, in ruins.

Still standing in the crater of what was once two of the most powerful and respected organizations in crypto is Binance CEO Chengpeng Zhao. Also known as CZ, he is a former ally-turned-rival of SBF. Whether CZ was the architect behind the failure of those two projects or was just acting to protect his own company will be a point of contention, probably for years.

Things escalated quickly after Coindesk released a news report. The publication claimed to have seen documents showing that Alameda Research had an unusually large exposure – over half of its net assets – to FFT, the native token on FTX.

Before the report, there were generally no concerns about the financial health of FTX. Sequoia Capital, which had invested US$150 million in FTX in 2021, said its due diligence found a company making US$1 billion in revenue and US$250 million in operating income.

There’s nothing illegal about Alameda holding FTT, but it raised concerns that the project had too much of a stake in a sister company that was supposed to be operating independently. If the value of FTT were to drop, it could have adverse effects on both.

Remember, FTT is a volatile cryptocurrency and not a fiat-backed stablecoin. Anyone with a memory that goes back further than six months will understand why that’s a concern.

Enter CZ, stage right. Binance had bought out of FTX last year and taken an estimated 23 million in FFT as payment. CZ certainly remembered the Luna crash, and said so. He also announced to the world that Binance would liquidate its entire holding of FTT over the next few months.

Why CZ said this is unclear, but you’d expect that the head of the largest centralized exchange in the world would understand the consequences of that statement.

There was a sell-off, which drove down the price of FFT from US$22 to US$16. Caroline Ellison, CEO of Alameda, offered to buy Binance’s FTT at US$22 a token. But CZ turned it down, saying he’d rather take his chances on the open market.

After that, the run was on. Reuters reported that over US$6 billion was pulled from FTX, and Binance on Tuesday ceased withdrawals of everything except fiat money. SBF took to Twitter and tried to persuade everyone that everything was OK and assets were secure. The short position on FTX kept growing, underscoring the point that much of the market didn’t believe him.

CZ claimed FTX turned to him for help, so he offered to buy the company pending due diligence. That process lasted less than a day before the deal was called off. Everyone wants to know what Binance found there, and the company did release a statement that mentioned mishandled customer funds and alleged US agency investigations into FTX.

By Thursday, SBF was no longer a billionaire and FTT, which once traded at US$22, was worth only US$2.35. FTX, which used to be the world’s third-largest crypto exchange, announced that without a capital injection to cover an US$8 billion shortfall, bankruptcy is the likely end.

See also: Why the FTX collapse is a big deal

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THE BIG STORIES

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⭐ TO THE STARS

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🌙 TO THE MOON

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🌏 BACK TO EARTH

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STILL A PONZI SCHEME

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