This story was originally published in FIN, the best newsletter about fintech; subscribe here.
On January 1, 2022, if you had asked anyone in the crypto world what the most earth-shattering event this year would be, the most likely answer would have been how long the crypto winter would last, or perhaps the Ethereum merge, which simultaneously was a big deal yet so far has changed very little.
By contrast, very few people’s crypto bingo cards had an entry reading “The world’s second-largest, and one of its most-respected, crypto exchanges will buy up a bunch of bankrupt crypto companies in the spring, only to find itself bankrupt in November with very serious allegations of embezzlement surrounding its once-prestigious founder and CEO.”
With the possible exception of Elizabeth Holmes and Theranos, it’s hard to think of a harder corporate downfall than that of Sam Bankman-Fried and FTX. And even Holmes’s ultimate descent took months of investigative and prosecutorial investigation before the company evaporated; FTX fell apart in a couple of days, almost entirely as a result of a single news story and some skeptical tweets (plus, you know, being bankrupt, which became official on November 11).
Moreover, while of course Holmes had her high-octane board of directors and prestigious investors, no one could match the reach by which FTX and Bankman-Fried attempted to influence American life, finance and public policy over a very short time period. Consider:
- In 2020, Bankman-Fried split $5.2 million between two super PACs aimed at electing Joe Biden as president.
- In June 2021, FTX spent $135 million to obtain 19 years of naming rights to the Miami Heat’s home arena.
- That same month, FTX spent $210 million to sponsor the esports team TSM (Bankman-Fried is known to be a heavy video game player; reportedly he was playing League of Legends while making a pitch to a prestigious venture capital firm in 2021).
- In July 2021, the umpires in Major League Baseballs’s All-Star game wore FTX logos on their uniforms, the first time that umpires had accepted corporate branding, which continued through the end of the 2022 season.
- On December 8, 2021, Bankman-Fried testified in a largely cordial hearing of the House Financial Services Committee, chaired by Maxine Waters (D-CA). He told the committee that a year and a half after it launched, FTX was handling about $15 billion in crypto transactions daily, which represented about 10% of global crypto trading volume. Unlike some strident anti-government leaders in the crypto world, Bankman-Fried told the committee “FTX fully supports a regulatory framework for the trading of digital assets that protects investors and delivers on the hallmarks of orderly markets.”
- In January 2022, FTX announces a new $400 million round of funding, valuing that company at $32 billion.
- In February 2022, along with other crypto and fintech companies, FTX aired a Super Bowl ad, featuring Larry David.
- Throughout early 2022, FTX and Bankman-Fried became major contributors to American political campaigns, mostly on the federal level. Protect Our Future, a super PAC bankrolled by Bankman-Fried and a fellow FTX founder, ultimately spent $28 million on Congressional candidates, including $11 million on an Oregon Democratic primary candidate named Carrick Flynn, who lost 2-to-1. Another FTX-connected super PAC, GMI PAC, raised millions but, according to the Open Secrets Web site, never actually spent any money on races.
- In May, FTX bought 56 million shares in Robinhood, representing a 7.6% ownership in the oft-troubled trading platform.
- When the Terra/Luna stablecoin system fell apart in May, several crypto companies announced layoffs and account limits or suspension. FTX stepped in as a kind of savior, offering a $250 million line of credit to crypto lender BlockFi, and buying the assets of bankrupt crypto lender Voyager for $1.42 billion.
- In June, Bankman-Fried emerged as one of the chief investors in Semafor, the highly anticipated media company headed by industry veterans Ben Smith and Justin Smith that launched in October.
The most urgent questions that need answers are: What was so wrong with FTX’s business, and why did none of FTX’s presumably sophisticated investors and partners pick up on it? And given all of FTX’s connections, how bad will its bankruptcy affect markets?
It will take months or years to have complete answers, but the biggest flaw in FTX’s business appears to be that it was perilously close to Bankman-Fried’s other company, Alameda Research, a brokerage firm he founded in 2017, two years before FTX. FTX had a native token called FTT that allowed its holders to save trading fees on the FTX platform. It turns out, however, that an unhealthily large portion of Alameda’s holdings were in some form of the FTT token. CoinDesk, in what will undoubtedly turn out to be the crypto scoop of the year, got a peek at Alameda’s balance sheet and published a story on November 2 showing that the single largest holding on Alameda’s $14.6 billion balance sheet was FTT. From there the unraveling was especially swift; on November 6, Changpeng Zhao, head of FTX rival Binance, tweeted that his company was taking any FTT off its books. For a day or two it looked like Binance was going to take over FTX, but after a round of due diligence it backed away from its letter of intent, and within a day or so FTX declared itself bankrupt, with Bankman-Fried resigning amid apologetic and sheepish tweets.
Since then, hundreds of millions of dollars have been drained from FTX wallets. On Saturday, November 12, FTX’s new CEO John Ray declared that the company had been hacked and was cooperating with law enforcement. Crypto Twitter treated the announcement with skepticism and ridicule, while rumors of embezzlement and decamping staff abound.
How bad will the fallout be? G-Zero’s newsletter Signal asked on Friday “Is this crypto’s Lehman moment?” The answer depends on how you define a “Lehman moment.” Certainly for entities tied directly to FTX, the damage is massive and probably long-lasting. For example, here is how Robinhood stock performed over the last five days, compared to the Nasdaq as a whole:
In addition, BlockFi has announced that it has suspended withdrawals until further notice. A source told Bloomberg “BlockFi is no longer certain about where the funding for its credit line with FTX US and the collateral for the Alameda loans came from…citing concerns that it could have originated with customer funds.” Voyager has to reopen its bankruptcy bidding, since FTX will no longer be putting up money for it. Look for a new name for Miami’s FTX Arena, and by spring training the FTX logo will be off the umpire’s uniforms.
The present picture for crypto as a whole is also fairly dark. Bitcoin is trading at a two-year low, and over the past seven days some $3 billion in Bitcoin has been pulled off of exchanges. The UK arm of Banco Santander has placed fairly strict caps on how much its customers can spend on cryptocurrency exchanges. With investors spooked or otherwise inhibited, it’s a safe bet that other exchanges are going to get hurt. Crypto.com raised eyebrows this week when it was compelled to reveal that 20% of its reserves are held in a meme token called SHIB, and while Coinbase’s stock has not been hurt as badly as Robinhood’s, it’s still worth less than a third of its price a year ago.
For those who read a “Lehman moment” as meaning something that will set off a lengthy recession, that’s probably overblown. The crypto world is smaller than it was a year ago, and still fairly roped off from the rest of the global economy. If one or more major countries goes into recession any time soon, there will be broader macroeconomic reasons. Nonetheless, the FTX bankruptcy is the furthest-reaching crypto scandal to date, and we’ve not yet seen the end of it.