FTX Bank Run: An Unexpected Turn Of Events

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Sam Bankman Fried

Most activities in the crypto industry follow meticulous planning before execution. As a result, there is often no room for spontaneous actions. Yet, the crypto space can be theatrical from time to time.

Indeed, dramatic events do occur in the crypto industry. Binance's ongoing deal to buy FTX is a perfect example of a dramatic twist no one foresaw.

Intent on ending its relationship with FTX, Binance is now about to buy its competitor. How did matters get to this point? What lessons can we learn? Here is an analysis of events in the crypto markets over the last few days.

An overview of Binance and FTX's joint history

Often viewed as rivals, Binance and FTX are two crypto-based platforms with a long history. Unknown to many, the Binance exchange was an early investor in the FTX project. 

Yet, the relationship lasted only a short time. A split came about due to differences in management styles. Announcing the split during an interview with the Decrypt blog, FTX CEO Sam Bankman-Fried stated, "We recently repurchased shares from Binance to buy them out of our cap table,"

When asked why he ended the investment relationship with Binance, Sam responded, "I think there are some differences between how we run our businesses. I think there are ways I would have reacted, responded, and run things differently. And we have been running things differently."

The investment relationship between the two exchanges ended in 2021. Yet, Binance continued to hold FTT tokens obtained as payment for selling its shares. The total token's value is worth about $2 billion.

What caused FTX's insolvency?

Before its current problems, the FTX exchange enjoyed significant growth and acceptance globally. FTX CEO Sam Bankman-Fried was rich, famous, and considered a genius by many in the crypto community.

The FTX exchange held funding rounds to increase its investment portfolio. The two most recent examples are Aptos and Sui. Aware of the reasons behind Luna's crash, Sam continued to expand his business.

FTX US acquired bankrupt crypto lender Blockfi for $240 million. This was part of Sam's aggressive expansion moves. The exchange also bought  Voyager Digital, another crypto lending platform with financial issues. The deal to buy Voyager was worth approximately $1.4 billion.

There are also reports that FTX considered bailing out crypto lender Celsius. FTX did not move forward with the acquisition. Despite appearing to be strong on the outside. There were indications that the project had some issues.

In a string of resignations, Alameda's co-CEO and FTX president left their roles within a month. On August 20, 2022, Alameda co-CEO Sam Trabucco quit his position. Although he remained an advisor, he was no longer part of crucial day-to-day decisions.

FTX president Brett Harrison also took up an advisory role. He did this after resigning from his position as president. Also, it became public knowledge that Texas securities regulators were investigating FTX.

Despite facing those challenges, Bankman-Fried still enjoyed the support of the crypto community. But that changed after the DCCPA draft bill found its way online. Before its release, Sam had expressed support for the bill.

Unlike Sam, key industry players spoke against the DCCPA bill. The bill's wording indicated an imminent attack on the DeFi space. Such an attack would also affect peer-to-peer transactions.

As such, it is understandable that DeFi users will move against the bill. Sam's interview with Erik Voorhees did not help matters. In the interview, Sam could not provide any valid reason for supporting the bill.

The lack of adequate responses to critical questions led to a loss of support. Some of FTX's problems can be linked to Sam's lack of goodwill in the crypto community.

Alameda Balance Sheet

Shortly after the DCCPA bill made its way to the public, Sam suffered another major blow. On November 2, 2022, Alameda's balance sheet became public.

The balance sheet exposed Alameda Research (FTX sister company). According to the report, Alameda depended on the FTT token as its principal cash reserve.

Usually, crypto giants of that size use an independent asset as their cash reserve. The reserves could be fiat currency, stablecoins, or crypto assets. As a result, crypto users were not pleased with the information from the balance sheet.

Another cause for concern was the liabilities on the balance sheet. According to the sheet, Alameda Research has $14.6 billion in assets and $8 billion in liabilities. As an illiquid asset, banking these liabilities against the FTT token was a horrible idea.

In response to the leak, Alameda CEO Caroline Ellison stated that the leaked balance sheet only told part of the story. Yet, the leak destroyed any support FTX and Sam Bankman-Fried enjoyed in the crypto space. It also moved Binance CEO into action.

Binance Seeks To End All Ties With FTX

Responding to the reports, Binance CEO Changpeng Zhao (CZ) released a tweet. According to CZ's tweet, the Binance exchange would liquidate all FTT tokens in its portfolio.

In response, the CEO of Alameda Research, Caroline Ellison, offered to buy the FTT tokens at $22 per token. CZ rejected this proposal. Thus, opting to sell the tokens on the free market over an extended period.

Several theories soon emerged on Twitter about Binance's actions. According to some individuals, Binance made this move to assert its dominance. Others state that the move was a way to undermine FTX.

Responding to such views, CZ gave a different opinion. In a series of tweets, he suggested that the decision was due to FTX's current challenges.

The announcement caused a considerable stir in the crypto community. Many FTX investors tried to withdraw their funds from the platform. As demand for withdrawals reached an all-time high, FTX paused withdrawals. A clear sign that the exchange has become insolvent.

Binance Set To Buy FTX

In this story's most dramatic twist yet, Binance will now buy the FTX exchange. A tweet released by Sam Bankman-Fried stated that FTX would have new owners. According to the tweet, FTX had agreed to enter a strategic transaction with Binance.

CZ also announced via Twitter that FTX had reached out for help due to a liquidity crunch. Thus, Binance would buy FTX to protect its users and solve the liquidity crunch. Yet, the takeover process will be subject to due diligence before completion.

Lessons From FTX Fall

The recent fall of FTX provides many lessons to big players in the crypto community. Among other things, crypto platforms must act transparently. Acting transparently will help prevent the loss of trust in the crypto industry.

The crypto industry is still in its nascent stage. Thus, industry players must ensure they act transparently. Doing this is the only way to guarantee the continued growth of the ecosystem.

Transparency in form of Proof-of-reserves is needed

Proof of reserves needs to be introduced for centralized crypto platforms so that they can be held accountable. Such reserves must be free from debts. FTX and Alameda increased the value of their liabilities by seeking to expand.

Binance is set to introduce this, and it will set the new industry standard for transparency.

Greed always leads to a fall

Alameda failed by relying on the illiquid FTT token as its principal cash reserve. Through its actions, FTX jeopardized the financial safety of its users. Such actions do not bode well for the growth of the crypto industry in the long term. Instead, it provides ammunition for financial regulators.

Currently, regulators are intent on crippling the crypto industry with unfavorable laws. Engaging in dishonest and greedy acts will only lend support to their cause.

Adopting a more reserved approach may have helped FTX avoid its current problems. Supporting the DCCPA draft bill was another blow to Sam. Major players in the crypto industry were against the bill. 

Thus, Sam's support ruined any goodwill he enjoyed within the crypto community. These factors have all culminated in the potential sale of the FTX exchange to Binance.

Conclusion

Given the nature of their relationship, we may still see some twists in this story. Yet, we hope this new partnership will help cover users' losses.

Looking at the future, we are yet to understand how this partnership will work. Also, there is no way to know how it will affect the industry in the long term. Yet, we know we will experience more dramatic events in the crypto space over the coming days.

Written by
Trust Akpobome

Most activities in the crypto industry follow meticulous planning before execution. As a result, there is often no room for spontaneous actions. Yet, the crypto space can be theatrical from time to time.

Indeed, dramatic events do occur in the crypto industry. Binance's ongoing deal to buy FTX is a perfect example of a dramatic twist no one foresaw.

Intent on ending its relationship with FTX, Binance is now about to buy its competitor. How did matters get to this point? What lessons can we learn? Here is an analysis of events in the crypto markets over the last few days.

An overview of Binance and FTX's joint history

Often viewed as rivals, Binance and FTX are two crypto-based platforms with a long history. Unknown to many, the Binance exchange was an early investor in the FTX project. 

Yet, the relationship lasted only a short time. A split came about due to differences in management styles. Announcing the split during an interview with the Decrypt blog, FTX CEO Sam Bankman-Fried stated, "We recently repurchased shares from Binance to buy them out of our cap table,"

When asked why he ended the investment relationship with Binance, Sam responded, "I think there are some differences between how we run our businesses. I think there are ways I would have reacted, responded, and run things differently. And we have been running things differently."

The investment relationship between the two exchanges ended in 2021. Yet, Binance continued to hold FTT tokens obtained as payment for selling its shares. The total token's value is worth about $2 billion.

What caused FTX's insolvency?

Before its current problems, the FTX exchange enjoyed significant growth and acceptance globally. FTX CEO Sam Bankman-Fried was rich, famous, and considered a genius by many in the crypto community.

The FTX exchange held funding rounds to increase its investment portfolio. The two most recent examples are Aptos and Sui. Aware of the reasons behind Luna's crash, Sam continued to expand his business.

FTX US acquired bankrupt crypto lender Blockfi for $240 million. This was part of Sam's aggressive expansion moves. The exchange also bought  Voyager Digital, another crypto lending platform with financial issues. The deal to buy Voyager was worth approximately $1.4 billion.

There are also reports that FTX considered bailing out crypto lender Celsius. FTX did not move forward with the acquisition. Despite appearing to be strong on the outside. There were indications that the project had some issues.

In a string of resignations, Alameda's co-CEO and FTX president left their roles within a month. On August 20, 2022, Alameda co-CEO Sam Trabucco quit his position. Although he remained an advisor, he was no longer part of crucial day-to-day decisions.

FTX president Brett Harrison also took up an advisory role. He did this after resigning from his position as president. Also, it became public knowledge that Texas securities regulators were investigating FTX.

Despite facing those challenges, Bankman-Fried still enjoyed the support of the crypto community. But that changed after the DCCPA draft bill found its way online. Before its release, Sam had expressed support for the bill.

Unlike Sam, key industry players spoke against the DCCPA bill. The bill's wording indicated an imminent attack on the DeFi space. Such an attack would also affect peer-to-peer transactions.

As such, it is understandable that DeFi users will move against the bill. Sam's interview with Erik Voorhees did not help matters. In the interview, Sam could not provide any valid reason for supporting the bill.

The lack of adequate responses to critical questions led to a loss of support. Some of FTX's problems can be linked to Sam's lack of goodwill in the crypto community.

Alameda Balance Sheet

Shortly after the DCCPA bill made its way to the public, Sam suffered another major blow. On November 2, 2022, Alameda's balance sheet became public.

The balance sheet exposed Alameda Research (FTX sister company). According to the report, Alameda depended on the FTT token as its principal cash reserve.

Usually, crypto giants of that size use an independent asset as their cash reserve. The reserves could be fiat currency, stablecoins, or crypto assets. As a result, crypto users were not pleased with the information from the balance sheet.

Another cause for concern was the liabilities on the balance sheet. According to the sheet, Alameda Research has $14.6 billion in assets and $8 billion in liabilities. As an illiquid asset, banking these liabilities against the FTT token was a horrible idea.

In response to the leak, Alameda CEO Caroline Ellison stated that the leaked balance sheet only told part of the story. Yet, the leak destroyed any support FTX and Sam Bankman-Fried enjoyed in the crypto space. It also moved Binance CEO into action.

Binance Seeks To End All Ties With FTX

Responding to the reports, Binance CEO Changpeng Zhao (CZ) released a tweet. According to CZ's tweet, the Binance exchange would liquidate all FTT tokens in its portfolio.

In response, the CEO of Alameda Research, Caroline Ellison, offered to buy the FTT tokens at $22 per token. CZ rejected this proposal. Thus, opting to sell the tokens on the free market over an extended period.

Several theories soon emerged on Twitter about Binance's actions. According to some individuals, Binance made this move to assert its dominance. Others state that the move was a way to undermine FTX.

Responding to such views, CZ gave a different opinion. In a series of tweets, he suggested that the decision was due to FTX's current challenges.

The announcement caused a considerable stir in the crypto community. Many FTX investors tried to withdraw their funds from the platform. As demand for withdrawals reached an all-time high, FTX paused withdrawals. A clear sign that the exchange has become insolvent.

Binance Set To Buy FTX

In this story's most dramatic twist yet, Binance will now buy the FTX exchange. A tweet released by Sam Bankman-Fried stated that FTX would have new owners. According to the tweet, FTX had agreed to enter a strategic transaction with Binance.

CZ also announced via Twitter that FTX had reached out for help due to a liquidity crunch. Thus, Binance would buy FTX to protect its users and solve the liquidity crunch. Yet, the takeover process will be subject to due diligence before completion.

Lessons From FTX Fall

The recent fall of FTX provides many lessons to big players in the crypto community. Among other things, crypto platforms must act transparently. Acting transparently will help prevent the loss of trust in the crypto industry.

The crypto industry is still in its nascent stage. Thus, industry players must ensure they act transparently. Doing this is the only way to guarantee the continued growth of the ecosystem.

Transparency in form of Proof-of-reserves is needed

Proof of reserves needs to be introduced for centralized crypto platforms so that they can be held accountable. Such reserves must be free from debts. FTX and Alameda increased the value of their liabilities by seeking to expand.

Binance is set to introduce this, and it will set the new industry standard for transparency.

Greed always leads to a fall

Alameda failed by relying on the illiquid FTT token as its principal cash reserve. Through its actions, FTX jeopardized the financial safety of its users. Such actions do not bode well for the growth of the crypto industry in the long term. Instead, it provides ammunition for financial regulators.

Currently, regulators are intent on crippling the crypto industry with unfavorable laws. Engaging in dishonest and greedy acts will only lend support to their cause.

Adopting a more reserved approach may have helped FTX avoid its current problems. Supporting the DCCPA draft bill was another blow to Sam. Major players in the crypto industry were against the bill. 

Thus, Sam's support ruined any goodwill he enjoyed within the crypto community. These factors have all culminated in the potential sale of the FTX exchange to Binance.

Conclusion

Given the nature of their relationship, we may still see some twists in this story. Yet, we hope this new partnership will help cover users' losses.

Looking at the future, we are yet to understand how this partnership will work. Also, there is no way to know how it will affect the industry in the long term. Yet, we know we will experience more dramatic events in the crypto space over the coming days.

Written by
Trust Akpobome