FTX/Binance: crypto’s leading man gets his comeuppance
The humbling of Sam Bankman-Fried deals a further blow to the industry
Of all people, Sam Bankman-Fried should have known better. The millennial known as SBF had become the face of the crypto industrial-complex. The shaggy hair, board shorts and Bahamas domicile gave the FTX exchange boss a friendlier image than his business tactics warranted. In the jungle of crypto, he was a predator scooping up weaker players when the market shifted against them.
On Tuesday, he became the prey. Binance, the business of Changpeng “CZ” Zhao, SBF’s only genuine rival, announced it would acquire FTX. Though details are scant, this had all the hallmarks of distressed takeover.
The nascent crypto industry was already struggling with a price crash triggered by the end of the cheap money era. The humbling of SBF is a further blow.
FTX had been valued recently at $32bn. Its celebrity endorsers made it seem safe and respectable. SBF was, at least before this week, a billionaire philanthropist. The exchange’s apparent collapse again shows ordinary investors would be wise to steer clear of the largely unregulated cryptocurrency ecosystem.
The collapse of FTX has been likened to a bank run: Account holders were rushing to get their crypto assets but were blocked from doing so.
FTX is ostensibly a marketplace or exchange where withdrawals should not be problematic. The halt in withdrawals suggests that account holders’ assets were somehow leveraged, lent out or otherwise spoken for.
One question concerns the relationship between FTX and SBF’s separate crypto investing vehicle, Alameda Research. A few days earlier, CZ Zhao had said he was dumping FTX’s own coin, FTT, which according to reports may have been a big part of the Alameda balance sheet.
Just how a collapse in the price of FTT hurt Alameda and then FTX is a crucial issue. FTX, if simply a marketplace, should not be overwhelmed by the stress in crypto price volatility. SBF before Tuesday had brushed off suggestions that FTX account holders would not be able to get demanded liquidity.
Account holders had little to no visibility into the balance sheet and operations of FTX. Operators will have to share such details with customers if so-called decentralised finance is ever to enter the mainstream.
For now, investors should take the precautionary view that their money may be at risk if they trust it to a crypto exchange.