Yesterday, on the 21 st of November, 2020, our inboxes were flooded with a grim notification.
If we can say anything for certain at this particular point in time, it’s probably that the Board
at FTX – a crypto exchange with assets in the billions of dollars – had it grimmer. The
Bloomberg blares “FTX owes its biggest unsecured creditors more than $3 billion dollars.”
Three. Billion. Dollars.
If you haven’t been living under a rock, you know that with where FTX is at currently, that is
simply out of the question. In early November this year, the exchange filed for bankruptcy
protection. Sam Bankman-Fried, CEO and Founder of FTX – and a man who apparently
strikes deals while playing League of Legends – has formally resigned from his position.
This is huge! FTX was a company that once commanded enough clout to have a Super Bowl
commercial. If you’re in America, that’s the primetime of primetimes. In many ways, FTX
and by extension, Bankman-Fried were one of the faces of crypto. So, what happened?
This article will attempt to explain the relevance of the recent FTX debacle and try to put into
perspective why the failure of the exchange has truly shaken the crypto world. As far as these
two authors are concerned, FTX’s spectacular fall from grace is not simply a case of another
failed promise – it’s a wake-up call for the crypto industry to introspect and advance.
FTX – The Promise
At its barebone basics, FTX is an exchange: it’s a platform for buying and selling crypto-
currencies or various kinds of digital assets. Of course, most platforms don’t simply stop at
being just “exchanges.” There are a plethora of products and services that may be offered by
these platforms. Take Coinbase – arguably the most popular crypto exchange – for instance:
apart from just facilitating the trade of cryptocurrencies, Coinbase also offers Wallet services
for individuals. Beyond this, Coinbase also offers an array of services aimed at businesses,
institutional investors and even developers who wish to build web3 applications. FTX was
the same, however, people fawned over it because of its low fees, advanced order options and
its NFT marketplace.
For these authors, to understand the importance of an exchange as large as FTX, it’s pertinent
to note that cryptocurrencies are still at a very nascent stage of development. Exchanges are
the crypto-equivalents of markets. In this case, however, they facilitate the first transactions
of a new economic system!
Every system of currency needs a medium through which trades may take place. Quite
obviously, exchanges play this role. The emergence of large marketplaces that facilitate
exchange inevitably means that the technology is gaining acceptance. Therefore, at so nascent
a stage in the development of cryptocurrencies, the exchange becomes a representative of the
industry itself – it’s the place where money changes hands in the crypto world.
And this is precisely why FTX’s demise is earth-shaking – it stood for something.
Cryptocurrencies stood for a new and transparent way of striking deals. FTX is simply the
next one on an already long list of companies in crypto that failed. The disappointing fact
here, is that FTX’s demise is a case of pure financial fraud.
FTX – The Fall
The downfall of FTX was triggered by CoinDesk’s report on FTX’s financial health. The
report claimed that Alameda, a trading firm owned by the FTX’s founder Sam Bankman Fried
held FTT Tokens worth billions of US Dollars. FTT is an FTX-launched Cryptocurrency
token that derived its value from the privileges that the token holders receive when they trade
on the FTX exchange.
Further, FTX bought its own FTT tokens in large volumes, which inflated its value. Alameda
had already purchased the FTT tokens at low prices. As the FTT tokens zoomed, Alameda’s
assets ballooned because a significant part of its balance sheet (40%) consisted of FTT.
Alameda pledged these FTT tokens to secure loans, and it is alleged that FTX partially
funded Alameda with its clients’ funds.
When this news was exposed by CoinDesk, Changpeng, the CEO of the world’s largest
crypto exchange Binance, tweeted that Binance would offload its FTT tokens, and its prices
started plummeting. Subsequently, Alameda offered to buy the FTT tokens. To salvage the
industry, Binance finally made a non-binding offer to buy FTX subject to due diligence.
Later, it backed out of the deal, citing FTX’s mishandling of its customers’ funds and alleged
US investigations.
And that brings us to how we started this article – according to Bankman-Fried, the firm owes
$3.1 billion to its top 50 creditors. Unable to raise money from the investors to keep the firm
solvent, FTX has filed for bankruptcy.
What Next?
Crypto’s promise of transparency and trust is a key selling point for the technology. Fraud
taints confidence. This is exactly why we believe that the FTX debacle must be an
introspective episode for the industry.
Vitalik Buterin – he who co-founded Ethereum – agrees. Quite recently, he spoke to
Bloomberg about how the fall of FTX must not erode confidence in the de-fi protocols and
blockchain base layers that work “flawlessly.” He called for trust in transparent code above
individual humans.
Crypto still holds massive promise and there are many companies making strides in the field.
But the words of Buterin must not go unheeded. Decentralization is the ultimate aim.
Take it from Buterin himself: “Centralised anything is by default suspect.”
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