The cryptocurrency did not fail the business but lack of regulation and transparency of investor’s money did.
The latest to fall in the crypto world is FTX, the Bahamas-based cryptocurrency exchange. Headed by Sam Bankman Fried, known as the ‘white knight,’ the company practised bare-minimum transparency. A million creditors feel the pinch as the exchange filed for bankruptcy on 11 November in Delaware, USA.
Such was Fried’s talismanic charm, that Sequoia Capital invested $210 million even as he played during a video call with their investment team. Apart from this, 1.2 billion registered users who bought cryptocurrency tokens lost their shirts. Soft Bank, Blackrock and Temasek are also on the sucker punch list.
Fried started his crypto journey by arbitraging cryptocurrency and went on to open his Trading business firm Alameda Research. By 2018, the firm was making $1 million every day and using these profits, he founded FTX in 2019. He became a billionaire in 2021 as FTX became the world’s second-largest crypto exchange. In early 2022, FTX was valued at $32 billion with an NBA stadium named after it and was even endorsed by Tom Brady.
A prominent donor to Biden’s campaign, lobbied to shape legislation governing the unregulated crypto world. Ironically, he used this lack of regulation when he used $10 billion in customer funds to prop up his trading firm.
Fried was called the ‘crypto’s white knight’ for handling bailout cash in hundreds of millions trying to prop up failing crypto firms and claimed to have $2 billion in reserves for that. One wonders why he did not create an account of his own or was it all a sham to hide what was going on in FTX?
The Downfall
FTX had its own token, FTT, which users used to trade on FTX. Employees were given the option to take salaries and bonuses. However, FTTs were not widely distributed and were held mainly by Bankman’s sister firm Alameda which used funds from FTX to buy the FTTs. Hence, a significant part of Alameda’s Balance sheet has FTT tokens as assets not backed by any real fiat but a coin that its sister company invented. On the other hand, real money paid by the customers and depositors of FTX was being used for speculative bets on crypto.
When Binance CEO started selling all its FTT holdings, it led to investors trying to withdraw their money and that’s where it cracked, for FTX did not have the money. And thus began the end.
The crash has created a ripple effect on an already sliding crypto world and with the endless winter, spring seems far away. Fried and his top brass tried various investors, but everyone was already spooked and though Binance initially agreed to buy the firm, it pulled out of the deal. FTX ultimately filed for bankruptcy and FTT is now trading at less than $2 from its mighty high of $80.
One must remember that it is not the currency that failed but the business which could funnel investor money primarily due to a lack of regulation and transparency.
