At the beginning of November (11/7/22-11/11/22) one of the world’s largest cryptocurrency exchanges (a place where cryptocurrency is bought and sold PWC Explainer; Oswego Explainer), FTX, declared bankruptcy.
It’s co-founder, Sam Bankman-Fried (SBF), was considered the darling of the crypto world and at one time had amassed a wealth of close to $30 billion. Until November 7th, he retained most of that wealth.
The value of his brainchild, FTX, crashed when CoinDesk ran an article indicating that FTX lent $10 billion to Sam’s hedge fund, Almaeda Research, which was run by his 28 year old girlfriend (Sam is 30). It appears there was concern the hedge-bets went bad and those with deposits sought to withdraw their funds. When they did, FTX no longer had the money to cover the withdrawals (FTX had less than $1 billion against $9 billion in liabilities). Such a transfer from TFX to Almaeda was a violation of FTX’s Terms of Service.
SBF appealed to investors to help cover the withdrawals (FTX has very reputable investors, including Sequoia Capital, which was an early investor in AirBnb, ). These investors were not interested in covering. Sam then turned to its competitor, Binance (owned by Changpeng “CZ” Zhao), for a bailout. Binance was originally interested, but withdrew after a preliminary examination of FTX’s books.
Mid-week, FTX was hacked and $600 million disappeared from its accounts. Some assert that these “hacks” are inside jobs. Existing funds have been moved to “cold storage” – wallets not connected to the internet.
The US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have initiated an investigation. Semfor
Prominent investors and promoters include Tom Brady, Gielle Buncen and Stephone Curry. The Miami Heat arena was name the FTX Arena util November 13th. MLB had “FTX” stamped on the umpire’s uniforms.
FTX is headquartered in the Bahamas, though it has many subsidiaries, including in the US (all have filed for bankruptcy). Reports indicate that many FTX staff who lived in the Bahamas have left for Hong Kong.
The viability of cryptocurrency has always been questioned because it is not backed by any government or real world assets. Therefore, a lot of its credibility rested on the backs of larger than life figures like SBF who not only sought to convince the world of their genius but also of their credibility to bring a maturing industry under government regulation.
Will the FTX Collapse Lead to Better Cryptocurrency Regulation?
The company’s spectacular downfall could cause future investors to be more cautious, and government agencies that oversee digital assets to be clearer and more stringent.
Does the government now need to step-in to regulate the crypto industry to save it?
The new generation of ardent bitcoin maximalists born from FTX’s ashes will, in time, hold their bitcoin keys on their own wallets (perhaps a Trezor or Ledger) and they will not be susceptible to Ponzi schemes propped up by the reputation of whoever the next paper billionaire with his/her own coin.
The pain felt right now is real. The feeling of having been deceived must be unbearable. But know that whatever shame, guilt, anger, depression or rage you have ties back to one source. Bankman-Fried got away with his lies for so long because “crypto” itself is built on a lie: What calls itself a revolution is really just the fiat system par excellence. Satoshi Nakamoto started a new network that makes double-counting impossible because everyone has the same view of what’s going on. It exists, while crypto can vanish.
This is the free market in action: Mistakes are punished and correct choices are rewarded. Both ideologically and economically, this week’s crypto fallout have only strengthened bitcoin and its advocates’ argument.