What led to FTX collapse?

Background on the FTX-Binance Drama

What. A. Week. The world’s third largest crypto exchange just went belly up, and the industry’s white knight got dragged down in the process. Grab a (Irish) coffee, and let’s figure out what the hell happened and what the implications are.

Sam Bankman-Fried (SBF) is the CEO of FTX, one of the world’s largest exchanges and also principal shareholder of Alameda Research, a separate trading firm he founded prior. There is also an entity called FTX.US. FTX.US is operated as a distinct U.S. operation, separate from FTX with SBF again acting as a principal though not overseeing day-to-day operations. FTX has received funding from big names like BlackRock, SoftBank, Temasek, Tiger Global, and the Ontario Teachers’ Pension Plan. FTX was also a large investor themselves through FTX Ventures, making over 60 individual investments.

FTX has an exchange token called FTT which can be used for benefits on FTX like lower fees and cheaper withdrawals. It is also considered pseudo-equity as a third of the revenue generated on the exchange is used to buyback and burn FTT, tying its price to the success of FTX.

The relationship between FTX and Alameda was always a bit unclear for outside parties, as SBF obviously played a pivotal role in the direction of the two distinct entities.

The trouble began when Coindesk reported on November 2 that Alameda’s assets (~$6 billion of the ~$15 billion) were in FTX’s FTT token. This amount of balance sheet concentration, the fact that it was largely illiquid (representing ~2x the circulating supply of FTT), and the link between the two entities caused immediate market concern. SBF made the link even more dubious by promoting the token on Twitter as recently as Halloween.

On November 6, Binance CEO Changpeng “CZ” Zhao announced that his exchange would liquidate $2.1 billion worth of FTT. Alameda offered to buy it at the market price of $22. CZ publicly seemed to decline…and so did FTT. Sharply.

With the price of FTT rapidly declining, concerns arose about FTX’s growing liquidity concerns and whether user funds were backed. About $6 billion was withdrawn in 72 hours before withdrawals were halted on the afternoon of November 8. Later that day Binance agreed, in principle, to acquire FTX and stem any liquidity concerns. However, after reviewing the FTX balance sheet, they have since walked away from the deal citing “the issues are beyond our control or ability to help.” They also explicitly cited “reports regarding mishandled customer funds and alleged U.S. agency investigations” as other reasons.

Just this morning (November 10) SBF released a statement blaming an internal error of tracking user margins for the liquidity crunch. He said FTX would spend the week trying to raise liquidity from investors and all funds will hopefully be returned to users. We’ll see.



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