The digital currencies market narrowly avoided a massive crash after news that the third largest exchange and its founder’s trading fund may be on the brink of insolvency emerged in the middle of the U.S. equities market trading day.
At the heart of the story is the FTX crypto exchange, helmed by the 30-year old U.S.-based billionaire Sam Bankman-Fried, and his trading firm Alameda Research.
FTX is prominently known for its marketing campaigns, such as a June of 2021 deal inked with Major League Baseball that led to the company logo being emblazoned on the vest of umpires.
The exchange also garnered attention when it purchased an ad during the 2022 Super Bowl featuring comedian Larry David.
On Nov. 2, digital currency news outlet CoinDesk published a piece based on “a private financial document reviewed by CoinDesk” that revealed balance sheets which indicate the two entities may not have been operating in a vacuum.
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The problem was both the contents and the size of Alameda’s balance sheet.
While on the one hand, Alameda boasted $14.6 billion in assets, on the other hand, $3.66 billion of those assets are composed of the FTT token, a digital IOU issued by the FTX exchange with virtually no value or utility beyond serving as a loyalty points system to reduce fees for users.
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An additional $2.16 billion was denoted as “FTT collateral.”
Contrasted against $8 billion in liabilities composed of $7.4 billion in loans, the reduction in Alameda’s true asset value produced by the FTX exchange IOUs was cause for concern among many analysts.
Within the remaining cluster of assets, only $134 million of cash and equivalents exist to underwrite the liabilities.
Neither FTX nor Alameda CEO Caroline Ellison chose to provide comment to CoinDesk at the time.
The news was exacerbated by an earlier Oct. 31 tweet by Bankman-Fried stating “It’s that time of the week again” with a link to the FTX trading platform’s FTT token and a screenshot appearing to show him about to make a $4 million purchase.
The move was seen by many in the community as an attempt to attract speculators and gamblers to a pump and dump operation.
The situation went largely without effect until Nov. 6, when rival exchange owner Zhao Changpeng of Binance, the world’s largest crypto exchange, announced on Twitter that his firm had decided to liquidate the $2.1 billion worth of FTT it held on its own books.
In response, Ellison tweeted at Zhao that Alameda “will happily buy it all [FTT tokens] from you today at $22!”
Ellison’s timing could be construed as somewhat insulting, however. During the exact hour she tweeted, the FTT token rose in value almost 10 percent from slightly over $23 to slightly over $25.
Although by late Nov. 7, the token had fallen to $22, it plummeted further to $15 by midnight Nov. 8 as holders and speculators rushed to sell FTT, fearing the impact of the Binance sell program.
Some pundits and members of the crypto community suspect that Binance’s move may have been retaliation after Bankman-Fried began lobbying in D.C. for a proposed piece of legislation sitting in the U.S. Senate called the Digital Commodities Consumer Protection Act (DCCPA), which contains verbiage that would crack down on decentralized digital currencies, and would likely restrict Binance’s business operations.
A Nov. 8 article published in Fortune magazine titled Sam Bankman-Fried was the Face of Crypto in D.C. What Would FTX’s Acquisition Mean for Regulation? openly proclaimed, “As lawmakers in D.C. have debated legislation to regulate the crypto industry, they have turned to Sam Bankman-Fried, the 30-year-old founder of FTX known for an unruly mop of hair and a willingness to open his checkbook.”
The quandary was that as the rumors of FTX’s insolvency spread during the New York Stock Exchange’s Nov. 8 trading session, the Chicago Mercantile Exchange Bitcoin futures market fell overnight from roughly $20,500 to $19,250, suddenly regained all of its losses, only to immediately sell off to a low of $16,750, moves of a 20 percent magnitude in the space of only four hours.
The low amounted to the worst price the futures market had printed since November of 2020.
Competing blockchain platform Ethereum likewise experienced a dramatic swing of similar magnitude, rocketing from $1,430 to $1,570 to $1,200 in the course of only a few hours.
The U.S. equities market, which had been enjoying a much needed rally, likewise temporarily sold off, with SPX500 futures losing almost 2 percent in 2 hours, giving back all of the day’s gains, and more.
The bleeding was quickly stopped, albeit perhaps ironically, when Zhao shocked the market, tweeting the following news, “This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire http://FTX.com and help cover the liquidity crunch. We will be conducting a full DD in the coming days.”
Bitcoin price has since stabilized in the $18,000-19,000 range in the hours since, as of time of writing.
Fortune waxed, “Bankman-Fried’s fall from grace raises doubts over his high-profile role in the industry—and how D.C. will approach regulation, including the Senate’s proposed [DCCPA], which many feel is long overdue.”
But unfortunately for the digital currency industry, which largely still operates as something of a “wild west” in the financial markets, the warfare and its impact on the equities market drew the fire of lawmakers.
Rep. Patrick McHenry (R-NC), Ranking Member of the House Financial Services Committee released a Nov. 8 statement that made it clear the calamity will only serve to hasten the pace of regulatory crackdown.
“The recent events show the necessity of Congressional action. It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S. I look forward to learning more from FTX and Binance in the coming days about these events and the steps they will take to protect customers during the transition,” McHenry stated.
In same day reporting by Reuters on the events, a spokesperson for the Commodity and Futures Trading Commission (CFTC) was paraphrased as saying the regulator “is monitoring the situation.”
According to the article, Bankman-Fried claims that the “non-binding letter of intent” announced by Zhao would only affect FTX and Binance’s overseas operations, and not their U.S.-based operations.