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The FTX Bankruptcy Is Crypto’s Worst Scandal Ever

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WASHINGTON DC – DECEMBER 8: FTX CEO Sam Bankman-Fried speaks at a hearing before the House Financial Services Committee at the Rayburn House Office Building on Capitol Hill in Washington, DC on December 8, 2021. I testify (Photo by Alex Wong/Getty Images) Getty Images

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On January 1, 2022, if you ask anyone in the crypto industry what the most shocking event of the year is, the most likely answer is how long the crypto winter will last, or perhaps the Ethereum merger. Yes and it was a big deal at the same time not much has changed.

In contrast, “The cryptocurrency exchange, one of the world’s second largest and most respected cryptocurrency exchanges, bought a bankrupt cryptocurrency company in the spring and will go bankrupt in November.” There were few virtual currency bingo cards written. There was once a very serious embezzlement allegation surrounding the honorable founder and CEO. ”

Aside from the possibility of Elizabeth Holmes and Theranos, it’s hard to imagine the downfall of a company as big as Sam Bankman-Fried and FTX. And even Holmes’ final descent took months of investigations and prosecutorial investigations before the company evaporated. FTX collapsed in days. Almost entirely the result of one news story and a few skeptical tweets (plus bankruptcy officially announced on November 11th).

Plus, of course, Holmes had her energetic board of directors and high-profile investors, but FTX and Bankman Freed tried to influence American life, finance, and public policy in a very short time. No one matched the range.

  • In 2020, Bankman-Fried split $5.2 million between two super PACs aimed at electing Joe Biden as president.
  • In June 2021, FTX spent $135 million to acquire 19-year naming rights to the Miami Heat’s home arena.
  • That same month, FTX spent $210 million to sponsor esports team TSM (Bankman-Fried is known for being a heavy video game player. He was reportedly playing League of Legends We will pitch to a well-known venture capital firm in 2021).
  • In July 2021, umpires at the Major League Baseball All-Star Game will wear the FTX logo on their uniforms. This was the first time the referees have embraced the corporate brand and will last until the end of the 2022 season.
  • On December 8, 2021, Bankman-Fried will A very heartfelt hearing for the House Financial Services Committee, chaired by Maxine Waters (D-CA). He told the commission that one-and-a-half years after FTX was launched, he is processing about $15 billion in cryptocurrency transactions daily, representing about 10% of the world’s cryptocurrency trading volume. rice field. Unlike some rebel leaders in the crypto world, Bankman-Fried told the committee, “FTX will create a regulatory framework for the trading of digital assets that protects investors and realizes the characteristics of an orderly market. I fully support it,” he said.
  • January 2022, FTX Announces New $400 Million Funding Round, Valuing Its Company At $32 Billion.
  • In February 2022, FTX aired a Super Bowl ad featuring Larry David, along with other cryptocurrency and fintech companies.
  • Through early 2022, FTX and Bankman-Fried contributed significantly to America’s political campaigns, primarily at the federal level. Protect Our Future, a super PAC funded by Bankman-Fried and his fellow FTX founders, ended up spending his $28 million on congressional candidates. Another FTX-connected super PAC, GMI PAC, has raised millions of dollars, but according to the Open Secrets website, it has never actually spent the money on racing.
  • In May, FTX bought 56 ​​million shares on Robinhood. This represents 7.6% ownership of the often troubled trading platform.
  • When the Terra/Luna stablecoin system collapsed in May, several cryptocurrency companies announced layoffs and account restrictions or suspensions. FTX stepped in as a savior of sorts, Offers $250M Line of Credit to Crypto Lender BlockFibought the assets of bankrupt crypto lender Voyager for $1.42 billion.
  • In June, Bankman-Fried emerged as one of the principal investors in Semafor, a highly anticipated media company led by industry veterans Ben Smith and Justin Smith, which launched in October.

The most pressing question that needs answering is what was so wrong with FTX’s business, and why didn’t any of FTX’s supposedly sophisticated investors and partners realize it? Given all of FTX’s ties, how much impact will its bankruptcy have on the market?

It will be months or years before we have a full answer, but the biggest flaw in FTX’s business is its dangerous proximity to another Bankman-Fried company, Alameda Research. right. FTX had A native token called FTT that allows holders to save on trading fees on the FTX platformHowever, it turns out that an unhealthy majority of Alameda’s holdings are some form of FTT token. CoinDesk will undoubtedly be the crypto scoop of the year, but Alameda’s balance sheet and The article was published on November 2nd. FTT is the single largest asset on Alameda’s $14.6 billion balance sheet. The unraveling from there was particularly quick. On Nov. 6, Changpeng Zhao, the head of FTX rival Binance, tweeted that his company was writing off his FTT. For a day or two it looked like Binance was going to take over his FTX, but after due diligence he withdrew the letter of intent and in a day or so he declared FTX bankruptcy and Bankman -Fried resigned amid an apology. and persistent tweets.

Hundreds of millions of dollars have flowed out of FTX wallets since then. Saturday, November 12th, FTX’s new CEO, John Ray, declared the company hacked cooperated with law enforcement agencies. Crypto Twitter is skeptical and deriding the announcement, while rumors of embezzlement and staff departures are circulating.

How bad will the fallout be? G-Zero’s newsletter Signal asked Friday, “Is this the Lehman Moment for cryptocurrencies?” The answer depends on how you define the “Riemann moment”. Indeed, for entities directly associated with FTX, the damage is devastating and likely long term. For example, here’s how Robinhood stocks have performed over the past five days compared to the overall Nasdaq:

Additionally, BlockFi has announced that it will suspend withdrawals until further notice. A source told Bloomberg “BlockFi is no longer certain where the financing of its line of credit with FTX US and collateral for the Alameda loan came from … showing concern that it may have started with customer funds. .” Voyager must reopen bankruptcy bid, because FTX doesn’t pay anymore. Look for a new name for Miami’s FTX Arena. By spring training, the FTX logo will be removed from umpire uniforms.

The current state of crypto as a whole is also pretty bleak. Bitcoin is trading at his two-year low, Nearly $3 billion of Bitcoin has been pulled from exchanges in the last 7 daysThe UK division of Banco Santander has fairly strict caps on how much money customers can spend on cryptocurrency exchanges. No doubt other exchanges will suffer if investors become upset or restrained. Crypto.com Raised Eyebrows This Week Coinbase’s stock hasn’t hurt as badly as Robinhood’s when it was forced to reveal that 20% of its reserves are held in a meme token called SHIB, but it’s still down a third of what it was a year ago. Worth less than 1.

For those who interpret the “Lehman Moment” as triggering a prolonged recession, that is probably exaggerated. The world of cryptocurrencies is smaller than he was a year ago and is still fairly disconnected from the rest of the global economy. If one or more major economies slip into recession any time soon, there could be broader macroeconomic reasons. Nevertheless, FTX bankruptcy is the most serious cryptocurrency scandal to date, and the end is still in sight.

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