This week’s dramatic implosion of the FTX cryptocurrency exchange continues to disgorge a seemingly nonstop parade of machinations and sordid revelations that threatens to engulf the entire digital asset sector.
On Thursday, the Securities Commission of the Bahamas (SCB) announced that it had frozen the assets of the Bahamas-based FTX Digital Markets “and related parties.” The SCB also “suspended” the company’s registration and applied to the nation’s Supreme Court “for the appointment of a provisional liquidator” of the troubled digital currency firm. Brian Simms, head of litigation at the firm of Lennox Paton, has been appointed as liquidator.
The SCB went on to say that it is “aware of public statements suggesting that clients’ assets were mishandled, mismanaged and/or transferred to [FTX’s sister company] Alameda Research. The SCB said such actions “would have been contrary to normal governance, without client consent and potentially unlawful.”
Earlier Thursday, on-chain data indicated that FTX had begun processing a small handful of withdrawals after freezing such activity earlier in the week. But FTX’s official Twitter feed later clarified that it was only processing withdrawals on behalf of local residents “per our Bahamian HQ’s regulation and regulators.” The message claimed FTX was “actively investigating what we can and should do across the world.”
1) Per our Bahamian HQ's regulation and regulators, we have begun to facilitate withdrawals of Bahamian funds. As such, you may have seen some withdrawals processed by FTX recently as we complied with the regulators.
— FTX (@FTX_Official) November 10, 2022
Thursday began with FTX founder Sam Bankman-Fried (SBF), clearly ignoring the advice of whatever lawyers remain on the FTX payroll—reports suggest the entire legal and compliance team quit on Wednesday—and issuing a lengthy Twitter thread that attempted to explain/justify the massive crypto carnage that is unfolding due to his hubris and deception (and the unwillingness of rival Binance to bail his ass out).
Without mincing words, SBF stated plainly that “I fucked up twice.” SBF blamed “a poor internal labeling of bank-related accounts” for miscalculating “my sense of users’ margin.” SBF went on to claim (without evidence) that FTX “currently has a total market value of assets/collateral higher than client deposits (moves with prices!).”
1) I'm sorry. That's the biggest thing.
I fucked up, and should have done better.
— SBF (@SBF_FTX) November 10, 2022
The liquidity of these alleged assets/collateral is another story. SBF pledged that his team was “spending the week doing everything we can to raise liquidity.” SBF claimed that he was talking with “a number of players” and “every penny” of any funds raised would “go straight to users” but he “can’t make any promises” that anyone with half a brain would throw a single dollar his way, particularly given what we now know about what precipitated FTX’s collapse.
As for Alameda, the SBF-owned market-maker whose unfunded balance sheet sparked this debacle, SBF said the business “is winding down trading” and “soon they won’t be trading on FTX anymore.” That’s a bit rich, given that there’s no guarantee that any individual or entity will be trading on FTX anytime soon.
SBF also stated that he’s willing to fall on his own sword “if I’m not wanted,” should any would-be investors/suckers not like what they see when they peruse FTX’s internal documents. Crypto’s former boy-wonder still hasn’t grasped that his halo is now so bent that it will no longer fit around his famously floppy hair.
FTX.US or them?
SBF claimed that his comments applied only to FTX.com and not the U.S.-facing FTX-US offshoot, which “was not financially impacted by this shitshow. It’s 100% liquid. Every user could fully withdraw (modulo gas fees etc). Updates on its future coming.”
Despite SBF’s assurances, FTX.US customers who logged onto the site found this message pinned to the top: “Announcement 2022-11-10: trading may be halted on FTX US in a few days. Please close down any positions you want to close down. Withdrawals are and will remain open. We will give updates as we have them.”
The trading halt could have something to do with a Bloomberg report that claimed some FTX.US staff were trying to sell certain assets without SBF’s “participation.” The assets said to have been flogged by these rogue staffers weren’t tokens but more tangible products such as the Embed stock-clearing platform and FTX’s infamous naming rights deal for the arena that the NBA’s Miami Heat call home.
As for why they’re going rogue, Axios reported that around half of the compensation given to FTX.US staff is in the form of equity, the value of which is sinking like a stone. Worse, should SBF file for bankruptcy protection, creditors could go after his other assets, including FTX.US, leaving staff with bupkis.
Axios suggested the U.S.-based Kraken exchange might choose to snap up FTX.US on the cheap, although former Kraken CEO Jesse Powell issued a tweet-storm Thursday that began with him saying he was “really trying to control my rage” regarding the brouhaha. Without naming names, Powell lambasted SBF, the venture capital funds that swallowed his lies and regulators/legislators for having driven crypto “offshore” by targeting “on-shore good actors” (allegedly facilitating economic sanctions-dodging by Iranians notwithstanding).
1/ This industry is made up of so many smart, passionate, open-minded, welcoming people, with genuine humanitarian interest at heart.
I know we're going to get past this. True believers will not be deterred. But, this is a massive setback. I'm really trying to control my rage.
— Jesse Powell (@jespow) November 10, 2022
California’s Department of Financial Protection and Innovation (DFPI) announced Thursday that it is “investigating the apparent failure of crypto asset platform FTX.” The terse statement offered no further details, only that the DFPI “takes its oversight responsibility very seriously.”
Meanwhile, the Associated Press quoted sources saying both the U.S. Department of Justice and the Securities and Exchange Commission were giving FTX a good once-over to conclude whether criminal laws or securities regulations have been violated. The answer to both of those questions would appear to be a firm ‘hell, yes.’
Trabucco’s boat springs a leak
Regarding Alameda, Reuters issued a report Thursday that shed new light on its role in FTX’s fall from grace. Reuters claimed that Alameda “suffered a series of losses from deals” in May and June, including a $500 million loan to Voyager Digital, which filed for bankruptcy protection in July. FTX.US went on to win the auction for Voyager’s remaining assets, in what now appears to have been a face/butt-saving move.
Citing sources “familiar with [Alameda’s] operations,” Reuters claims that SBF subsequently transferred “at least $4 billion in FTX funds” to help “prop up Alameda.” This $4 billion was “secured by assets including [FTX’s in-house token] FTT and shares in trading platform Robinhood Markets Inc.,” in which Alameda (aka SBF) had taken a 7.6% stake this spring.
Crucially, some of this $4 billion was “customer deposits,” although Reuters couldn’t confirm how much of this $4 billion consisted of customer cash that SBF had no right to move. SBF “did not tell other FTX executives” about this $4 billion transfer—and incredibly, nobody at FTX seemed to notice—because he was afraid that word would leak and spark a panic.
The Wall Street Journal reported that SBF had a meeting with investors this week in which he claimed that Alameda owes FTX “about $10 billion” after SBF played fast and loose with customer funds. (Alameda owes an additional $1.5 billion to parties not affiliated with FTX.) SBF graciously described this decision to loan out other peoples’ money without asking them first as a ‘poor judgment call.’
The timing of the bad Alameda bets that led to SBF’s illegal transfer preceded August’s abrupt resignation of Alameda co-CEO Sam Trabucco, who disingenuously claimed to want to spend more time on the new boat he’d recently purchased. Trabucco’s claim at the time that he “needed to relax, and I’m really, really happy” will now sound even more grating to the ears of FTX customers and investors who weren’t in the loop regarding the internal turmoil that led to Trabucco’s pursuit of aquatic happiness.
Here comes the Sun
Around the time that SBF was crafting his public message, the contents of an alleged internal message SBF issued to FTX staff on an internal Slack channel leaked on Reddit. In it, SBF said the goal of any new fundraising round would be “first to do right by customers; second by current and possible new investors; third all of you guys.” SBF ranked recouping his own investment in FTX as “fourth and last,” and only in “a hypothetical world where everything turns out amazingly and everyone else is done right.”
SBF claimed that FTX has “had talks” with Justin Sun, the spotlight-loving founder of the TRON blockchain, regarding a potential fund injection. On Wednesday, Sun tweeted that, as part of his noble pledge to “stand behind all Tron token,” he was “putting together a solution together [sic] with #FTX to initiate a pathway forward.”
Further to my announcement to stand behind all Tron token (#TRX, #BTT, #JST, #SUN, #HT) holders on #FTX, we are putting together a solution together with #FTX to initiate a pathway forward. @FTX_Official
— H.E. Justin Sun🌞🇬🇩🇩🇲🔥 (@justinsuntron) November 10, 2022
Multiple reports indicate that the hole on FTX’s balance sheet is well beyond Sun’s ability to plug. But Sun’s claims did spark a temporary surge in TRON’s native TRX token on FTX, which may have been the whole point of this very public ‘here I come to save the day’ proclamation.
On Thursday, Sun’s TRON DAO (decentralized autonomous organization) declared that it would buy $1 billion worth of Tether’s USDT stablecoin, despite the DAO having far less than that sum in its reserve (and the FTX official announcement of the ‘Tron Credit Facility’ indicated that the initial deposit by the ‘Tron Team’ would only amount to $13 million).
Fire up the Tether money printer
Sun’s announcement did help re-establish USDT’s 1:1 peg with the U.S. dollar. USDT briefly lost its peg early Thursday as rumors swirled regarding how much exposure Tether had to Alameda, the second-largest recipient of all USDT issued through 2021.
Tether previously sought to downplay those rumors through a blog post that claimed “Tether is completely unexposed to Alameda Research of FTX.” Tether acknowledged that its 1:1 ratio “may fluctuate” during “periods of market volatility” but this “has nothing to do with Tether’s ability to hold its peg nor the value or makeup of its reserves.”
Tether has infamously resisted submitting its alleged reserves to a proper third-party audit, effectively flipping the crypto mantra of ‘Don’t trust. Verify’ on its head. And yet Tether’s blog claimed that it “continues to lead the industry in both transparency and security,” which sounds an awful lot like the assurances SBF offered regarding the safety of customer assets on FTX, doesn’t it?”
Meanwhile, Thursday morning brought word that Tether had frozen $46 million worth of USDT on FTX held in a wallet that reportedly belongs to FTX. The unprecedented freeze was allegedly conducted at the request of law enforcement, which demonstrates (a) the authorities’ capacity to shut the barn door only after the cows have bolted, and (b) the utter mythology behind the claim that anything in ‘crypto’ is ‘decentralized.’
Not for nothing, but Tether’s freeze order came as reports indicated that someone at Alameda was shorting USDT for reasons known only to themselves. SBF’s Thursday morning Twitter thread claimed that Alameda “aren’t doing any of the weird things that I see on Twitter–and nothing large at all.” But SBF might be forgiven for taking a ‘from hell’s heart, I stab at thee’ approach given how his former partners-in-crime served up their ice-cold dish of revenge.
Twisting the knife
SBF’s Twitter thread obliquely addressed the widespread perception that FTX was sandbagged by Changpeng ‘CZ’ Zhao, the founder of Binance. Over the weekend, CZ sparked frenzied withdrawals by FTX users after threatening to dump hundreds of millions’ worth of FTX’s in-house FTT token, then backed out of a deal that would have pulled FTX’s ass from the fire.
SBF said, “At some point I might have more to say about a particular sparring partner, so to speak. But you know, glass houses. So for now, all I’ll say is: well played; you won.” In previous (since deleted) tweets, SBF had claimed that “a competitor is trying to go after us with false rumors” while insisting that “FTX is fine. Assets are fine.”
20) At some point I might have more to say about a particular sparring partner, so to speak.
But you know, glass houses. So for now, all I'll say is:
well played; you won.
— SBF (@SBF_FTX) November 10, 2022
Reuters’ Thursday report also fleshed out what we know about why SBF and CZ went from business partners to mortal enemies. The falling out began in May 2021, when FTX was seeking a license to operate in Gibraltar. Pressed by local regulators to submit information on FTX’s major shareholders – Binance originally held a one-fifth stake in FTX—SBF beseeched CZ for cooperation but received only silence.
In a three-month span, FTX attorneys sent “at least 20” requests for assistance on the sources of CZ’s wealth and details on Binance’s ownership structure. When an FTX lawyer complained to Binance’s CFO that Binance’s failure to engage was “severely disrupting an important project for us,” a Binance lawyer responded by saying FTX was out of luck because the requested information was “too general.”
His patience exhausted, SBF bought out CZ’s stake in FTX to the tune of $2.1 billion, and Gibraltar regulators approved FTX’s license two months later. But SBF went on to badmouth CZ/Binance in the press, which apparently stoked CZ’s desire for payback. And here we are.
This ongoing debacle prompted even the White House to weigh in with its opinion Thursday. Press secretary Karine Jean-Pierre warned that “without proper oversight of cryptocurrencies, they risk harming everyday Americans.” FTX’s implosion “underscores these concerns and highlights why prudent regulation of cryptocurrencies is indeed needed.”
Whether it’s CZ’s refusal to declare where exactly he or Binance call home, Tether’s unwillingness to submit to an audit, or SBF’s decision to spend customer funds propping up Alameda’s dodgy bets, the crypto community shares a genetic aversion to transparency coupled with a sense that the rules only apply to lesser mortals. Until it breeds these traits out of its DNA, ‘crypto’ will remain a joke—and a blatantly criminal one—in the eyes of everyone outside this space.
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