Last week Sam Bankman-Fried was the most important person in crypto. The floppy-haired 30-year-old former billionaire, who goes by “sbf”, is the founder of ftx, which was then the industry’s third-largest exchange. When crypto prices collapsed earlier this year he swooped in with loans for Voyager and BlockFi, providing the crypto-lending ventures hundreds of millions of dollars, and snapped up assets from Three Arrows, a distressed crypto hedge fund. Many compared him to John Pierpont Morgan, the banker who saved the American financial system in 1907.
Mr Bankman-Fried has also spent millions of dollars from his vast fortune, worth $26bn at its peak, to lobby Congress on crypto regulation. He planned to give away much of the rest, having endorsed effective altruism, a social movement that espouses charitable giving to safeguard humanity’s future. Politically engaged, seemingly altruistic, decidedly not a crypto bro: many thought sbf was the man who could save the industry from itself, a reputation he hardly discouraged.
Oh, how the mighty have fallen. After rumours that ftx might be insufficiently liquid began to swirl, investors pulled $650m of assets from the exchange on November 7th, before it stopped meeting requests. The value of an ftx Token, a mechanism for sharing the firm’s profits, has fallen by 84% since November 4th (see chart). On November 8th Mr Bankman-Fried and Changpeng Zhao, the boss of Binance, the biggest crypto exchange, announced that Mr Zhao’s firm had signed a letter of intent to buy ftx. Then on November 9th it pulled out of the deal, having taken a look at ftx’s books. Binance stated that ftx’s issues were “beyond our control or ability to help”. According to Bloomberg Wealth, Mr Bankman-Fried is now worth less than $1bn, a drop of 94%, the biggest one-day fall on record.
What on earth happened? Two stories are circulating, both a little Shakespearean. The first is one of rivalry and the second of hubris. Start with the rivalry between Mr Bankman-Fried and Mr Zhao. Mr Bankman-Fried owns three firms: ftx, a global exchange; ftx.us, an American exchange; and Alameda Research, a crypto-trading fund. In theory, these are separate entities. But the connections between Alameda and ftx have long been unclear. On November 2nd CoinDesk, an online publication, reported that tokens issued by ftx made up two-fifths of Alameda’s assets, sparking rumours that it was liquidating other assets to defend the value of ftx’s tokens. Apparently in response, Mr Zhao tweeted that he would liquidate Binance’s holdings of ftx tokens, then worth more than half a billion dollars.
That he later moved to snap up the firm led many to believe he had orchestrated the chaos—casting doubt on ftx to set off a fire sale. It seemed an easy story to swallow. There is little love lost between Mr Bankman-Fried, crypto’s golden boy, and Mr Zhao, who is wealthier but less acclaimed. Mr Zhao has long claimed his firm is headquartered “nowhere”. It is banned from providing some services in countries including Britain, in part owing to a lack of information about compliance with regulations. Mr Bankman-Fried has reportedly goaded Mr Zhao about this.
But Binance has now turned tail on bailing out ftx, suggesting the story may be better characterised as one of hubris. It is hard to know what has gone wrong inside the beanbag-strewn offices of ftx and Alameda. An exchange, which sits between buyer and seller and takes a spread, should not be an easy business to bankrupt. Typically exchanges are not exposed to runs, as they merely hold assets on behalf of investors. Perhaps Mr Bankman-Fried’s asset purchases and loans upset this balance.
Or perhaps it was the murky connection with Alameda that was the problem. It is easier to imagine things going spectacularly wrong inside a trading shop, which operates in a manner akin to a hedge fund. In coming up with its wealth estimates Bloomberg assumes that Alameda was the undoing of both firms, and that both are now worth just $1. Reports on November 9th suggested that the Securities and Exchange Commission, America’s top financial regulator, had months ago launched a probe into ftx’s handling of funds, as well as the connections between Mr Bankman-Fried’s firms. ftx has not yet commented on the matter.
Whatever the cause of the blow-up, the fallout will be terrible for crypto. The rout in prices had previously claimed only the types of victims that would be expected, including a poorly designed stablecoin, a hedge fund and several platforms that made risky loans. That it has now come for ftx, a well-regarded business, and Mr Bankman-Fried, crypto’s public face, is a blow. The carnage has spread to other parts of the industry. It has sent the price of bitcoin tumbling by 21% since November 8th, to $16,290 at the time of writing. And it has left other institutions scrambling to reassure customers. Coinbase, a large exchange, has sent out frantic missives to the press. Its share price has nevertheless shed a fifth of its value in recent days, and is close to all-time lows.
Depending on the goriness of the details, the collapse of ftx may be enough to reverse the embrace of crypto by institutions, ordinary folk and the occasional government. Institutional investors including Temasek, a Singaporean wealth fund; SoftBank, a Japanese tech-investing group; and Teachers’ Pension Plan, a Canadian pension fund, had all dipped their toes into crypto by buying stakes in ftx. Legislators will now eye the industry with even deeper suspicion. Whatever led to ftx’s spectacular implosion, the story is clearly a tragedy for the industry. Its detractors may see just a hint of comedy, too. ■
Source: Finance - economist.com
