Swimming naked
Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
There’s no way to couch it. In a matter of days, FTX chief Sam Bankman-Fried has gone from industry darling to potentially the worst actor the space has seen. Known for his “effective altruism” and regulatory lobbying, it’s now rumored that SBF has been using customer funds to prop up FTX’s trading desk, Alameda Research, with FTX’s native token FTT acting as collateral. In doing so, SBF has dug a $10B hole in FTX’s balance sheet, erasing customers holdings and eviscerating net worths.
Consequently, FTT dropped >90% in a day, while Bitcoin plunged to a new local low of $15,5k.
Unpacking a harsh week
Rumours began to simmer following a leaked balance sheet from Alameda research. The rundown of Alameda’s holdings raised alarms, with most assets tied up in illiquid coins and an insurmountable mountain of liabilities.
As these revelations came to light, Binance founder Changpeng Zhao (CZ) announced that his exchange would be offloading their FTT holdings, worth approximately $500m at the time. Both SBF and Alameda CEO Caroline Ellison attempted to downplay the situation, dismissing the balance sheet as false and making a baseless offer to purchase CZ’s holdings at a price of $22.
Mere hours later, SBF announced that FTX was to be acquired by Binance. However, after completing due diligence, Binance walked away from the deal – as most would when faced with a gaping hole of liability. With FTX now under investigation by the SEC, there seems to be little light at the end of Sam’s self-made tunnel.
Impact
SBF’s positioning as crypto’s poster child makes the current situation even more concerning. Crypto’s impassioned Capitol Hill advocate has now been outed as a fraud – a word this writer does not take lightly.
If the allegations are correct, then gambling away more than half of user funds to prop an “independent” trading desk is not a simple act of reckless miscalculation, but a flagrant violation of this space’s core principles.
As an industry, we’ve fought tooth and nail to dissociate from the criminal connotations that plagued BTC’s early days.
Emotions are bound to run high during times this stressful. Even the veterans among us are still reeling from this week’s revelations. Considering the serial calamities that have defined this year, it's arguable that FTX’s insolvency eclipses the rest combined.
Bear markets have a tendency to purge bad blood from the space, but it’s safe to say that few were prepared for the scandals that have rocked the industry throughout 2022.
Nevertheless, the current situation is already bringing much-needed transparency, with several exchanges now providing proof of reserves for their assets. When the dust settles, we can hope to enjoy a reinvigoration built on foundations of transparency, user protection, and true decentralization.
How long that may take is anyone’s guess.
