FTX's collapse demonstrates the critical role of regulated banks in reducing the inherent risks of digital assets
In early November 2022, the crypto market experienced a troubling situation that ended up with a chapter 11 bankruptcy for the second largest cryptocurrency exchange in the USA, and a huge debt to clients.
To buy or sell cryptocurrency an exchange is needed. The two biggest exchanges are:
- Binance (biggest)
- FTX (second biggest)
These two high profile managers are involved in this story:
- Changpeng Zhao, commonly known as "CZ,” the founder of Binance
- Samuel Bankman-Fried (also known as SBF)
To the facts:
- Some of these crypto exchange players have issued tokens that were also traded as a crypto asset and had a value. for example, Binance issued BNB and FTX issued FTT.
- CZ was one of the first investors in FTX, with over $3 billion worth of investment in FTX. CZ bought a significant amount of FTT and held on to them.
- SBF is also the owner of Alameda Research, a company that made many investments in the crypto space, and part of it was very speculative and risky. Alameda Research collateral was FTT tokens that were given to it by SBF.
- Like any other markets, Binance and FTX, the two biggest cryptocurrency exchanges, are rivals.
- FTX was valued at $32 billion, SBF was valued $26 billion, FTT token at ATH (all time high) was worth $10 billion.
Now, here is the story:
Last week, CZ announced that Binance will sell all of its holdings of FTT (tokens) due to “revelations that have come to light.” This was probably a leak that demonstrated Alameda Research is backed up by a lot of FTT as collateral. Allegedly, this FTT was transferred to Alameda by SBF illegally (by taking investors’ money from FTX and ‘investing’ it in Alameda).
After the decision of CZ to sell their shares in FTT, large pressure was placed on the price of the token, aiming to wipe out all the FTX collateral. Alameda started to sell many other tokens that they held, like Solana, to support the price of FTT, but with no success.
In the beginning, SBF tried to hide the situation and denied all the accusations, but a day later, CZ and SBF announced publicly that FTX is facing a significant liquidity crunch. In order to protect the users, Binance signed a non-binding Letter of Intent, intending to fully acquire FTX and help cover the liquidity crunch.
A few hours later, Binance announced that after due diligence and understanding that FTX mishandled customers’ funds, Binance will not acquire FTX. In the report, FTX was missing $8 billion dollars. A few hours later, SBF filed for bankruptcy, chapter 11.
If that was not enough, money started to move out of FTX - $477 million dollars was sent out of FTX wallets in what seemed to be a hack. It is still not clear if this was an inside job by SBF or if it was a real hack.
SBF was the prince of crypto, helping many companies post-LUNA collapse, and was a big fan of regulation on the crypto market. It seems like SBF was right and regulation is indeed needed to avoid Ponzi Schemes. SBF is now in the Bahamas, trying to escape from the authorities.
What can we learn from this?
Regulated entities are working better than non-regulated entities and when it comes to money, and the safest place for money is in a bank. Finastra payments supports custodian wallets and will allow its clients’ banks to convert fiat currencies to crypto, and crypto to fiat currencies, in a cheaper and safer environment.
Until then - put your digital assets funds in a private wallet owned by you.
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