Transcript:
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Intro:
Hello, listeners, welcome to this episode of Cryptonomix. Before we jump into today’s discussion, please keep in mind this recording is for general education and is not intended to constitute investment advice. Any opinions expressed are those of the participants and do not necessarily represent those of Withum.
Mark Eckerle:
Hello everyone. We are here releasing a special episode of Cryptonomix to really recap what has transpired over the last, we’ll call it 10 days or so with the collapse of FTX. Essentially, for the record, this is being recorded on Wednesday morning, November 16th. Um, just to recap, kind of what’s happened so far, really stick to the fact pattern, um, because there is gonna be some additional information and news to come out. So I just wanna make sure that we’re capturing the facts as they are coming out in real-time. So this past week has been, I would say, one of the most newsworthy periods within the digital asset space, especially since I’ve been in this space since early 2015. And I would bet to say probably since the beginning of Bitcoin, right? This is one of the largest events to really impact the industry. And, um, unfortunately, one of the most damaging, I would say within the last week and a half, what’s happened with FTX and Sam Bankman Freed, or SBF, who is the CEO of FTX.
It’s, it’s really sending waves across the digital asset industry. The full effect is still yet unknown, just due to the whole scale of Ft. X’s operations and really the reach that they have had across the industry. Each day there’s just more and more news about which companies are affected, and we’re just continuing to mind to the situation. That’s why it’s important to note that we are recording this as of new November 16th. Um, and I’ll do my best to stick to the just a fact pattern of what we know as of today. So, although the events that led FTX to this point are from the last few months and years, they, they really, I mean, they came about in 2019, so it’s a really short life cycle. Um, everything really started to boil up approximately last week. Um, I, I believe it was Sunday, November 6th when Changpeng Zhao or CZ, the CEO of Binance, which is the largest digital asset exchange, announced that they were going to sell all of their FTT tokens.
Now, FTT tokens are FTX’s native token that they created. The reason Binance had such a large amount of FTT tokens, um, was because as part of Binance exit from an FTX equity round, they received roughly 2.1 billion SD equivalent in cash, um, which was paid in both BUSD, which is a stable coin pegged one to one to the US dollar, and FTT tokens, which had a market cap and a fluctuating dollar price. Um, by making this announcement on Sunday, November 6th, uh, CZ essentially flooded the market, um, right, cause FTT tokens at that point were trading at $24 approximately. Um, and right now, as of today, less than 10 days later, it was actually less than three or four days later, they’re trading at one to $2. Now, um, as a result of that public announcement by CZ, there was essentially what was what’s in the crypto space and equivalent of a run on the banks.
Um, customers began swarming to ftx, began pulling their funds off of the exchange, which then resulted in a massive liquidity crisis for the exchange and ftx. And they, they ultimately were not able to sufficiently meet customer demands. It’s important to note that on, on Sunday, on November 6th alone, when this announcement was made, FTX processed over 5 billion of customer order withdrawals. They didn’t really come to the realization of the massive scale until I would say, around that Monday time period and into Tuesday. Um, because of ultimately this lack of reserves, the, the FTX had to halt all withdrawals, um, around Monday. And then ftt, the token experienced a significant decline in price as a result of this, right? And FTX essentially became insolvent and could not fulfill these customer liabilities that they had. On Tuesday, November 8th, FTX was scrambling for solution engaged in talks with Binance to acquire them. Um, that discussion ended less than 24 hours later, after Binance began their due diligence process and decided to ultimately pass on any acquisition. The reason still is yet fully unknown as to why Binance decided to pass. Um, but all that was cited was just, uh, lack of due diligence.
Um, this, this day on Tuesday is where the FTT token really experienced its major decline within this short window here. It opened Tuesday around $22, and then closed that day around $5. So that’s kinda where the massive shift began to happen. And the, the biggest question that everyone, everyone’s asking is, where are these assets that we’re supposed to be supporting these liabilities, right? Where, why were withdrawals halted? Um, and what ultimately happened to customer funds? So apparently many of the liabilities were being supported by their own token, the FTT token. So the decline in price when that happened, kind of all dissipated the the company’s assets all at once. Another important distinction to note that plays a a critical role in this entire picture here is FTX’s sister company, Alameda Research, which is the venture capital arm that SPF or, or Sam Bankman Freed, was previously the CEO of and stepped down on step down from over the summer to focus on FTX exchange itself.
Its unknown the full extent of customer liabilities. However, in the bankruptcy filing, FTX reported that they have more than a 100,000 creditors with assets in the range of 10 to 50 billion. Now, it’s also important to note that they clarify in that bankruptcy filing that they have liabilities rang from 10 to 50 billion, which is a massive range that they gave. Um, so it’s unknown still kind of where that number and where those, the assets and liabilities fall within those ranges. Um, now the, the reason for this major discrepancy, right, between assets and liabilities, as I alluded to earlier, ultimately boils down to the relationship between Alameda and ftx. Alameda effectively had an open line of credit from ftx, so basically they could borrow money at any point in time, and the, the amount was, I don’t wanna call it endless, but it was, it was pretty open-ended, right?
And it’s the, the block reported that anytime a custom rated deposit, right? So if you or I were to make a Bitcoin onto FTX, Alameda was effectively able to have a line of credit against that amount that I deposited. So they kind of opened up a, almost like a backdoor between the two entities, and were able to leverage those funds to then go make investments or, or other purchases that that VC arm from Alameda Research Kind wanted to fulfill their, um, objectives as a result of that line of credit, right? They would leverage the FTT token as collateral, so they would take user deposits for themselves, the digital assets, and then leverage FTX as native token as collateral for those lines of credits. So the decline with FTT token kind of created this trickle down effect to both entities, and it just, everything all boiled up all at once.
It is also reported that FTX held very little Bitcoin on their balance sheet at the time of the bankruptcy filing, while also maintaining approximately 1.4 billion of customer liabilities in Bitcoin. So that’s kind of, when you, when you, when you say where the, where did the assets go, it was all flowing through Alameda Research, it appears. Um, it’s important to note that FTX was previously reportedly valued at $32 billion as most recently as this summer. Um, and now as of last Friday, uh, on November 11th when they filed their chapter 11, chapter 11 bankruptcy, essentially that number has now gone to zero. They did file along with themselves, um, and approximately more than 130 other companies that were related, um, or are included in that Chapter 11 bankruptcy filing. So you could see clearly the reach that FTX and Alameda all had. Um, and there we’re still continuing to see more and more news of who is ultimately impacted by this major catastrophe or disaster within the digital asset space.
SPF has since resigned as CEO of, of FTX. He’s currently under investigation for multiple US agencies. Um, so we’ll continue to monitor the news as that, as that comes out, FTX has hired a new CEO in that time, John Jay Ray III, who was, it’s important to know, it was for the former Enron bankruptcy lawyer. So he’s kind of seen some scandals, kind of been through this before. So curious to see how this all shakes out. At the end of the day, I would just kinda like to end this, but basically with, with my opinion, crypto as a whole, we, we have a light side and a dark side, right? Just like traditional markets. The light being the goal of a, a trustless society, providing freedom, autonomy, really, really building a community together, right? And then the dark side, you have, same thing with fiat currency.
You have individual greed and corruption. And unfortunately, this, this past week has just really shown a light on that dark side. Now it’s, it’s not, I don’t wanna point out any moral learning opportunities because the, the impact that this has really had across the industry affects millions of users. There’s a lot of money at stake. So it’s just a, it’s a, it’s a sad time for everyone. And, um, like I said, we’ll continue to monitor the news. So, please look out for, for any further articles, press releases, and we’ll continue to push out content from Withum as a whole, as well as under our Cryptonomix umbrella. So wish everyone the best and thank you for tuning in. All views expressed in this podcast by Mark Eckerle or his guests are solely their opinions and do not reflect the opinion of Withum. This podcast is for informational purposes only.
