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FTX, one of the world’s largest exchanges, is run by Sam Bankman-Fried and is headquartered in the Bahamas. It has spent millions of dollars lobbying American legislators to institute crypto-friendly regulation.
FTX has a native cryptocurrency token called FTT, which traders use for operations like paying transaction fees. Last year, Mr. Zhao sold his stake in FTX back to Mr. Bankman-Fried, who paid for it partially with FTT tokens.
On Nov. 2, the crypto publication CoinDesk reported on a leaked document that appeared to show that Alameda Research, a hedge fund run by Mr. Bankman-Fried, held an unusually large amount of FTT tokens. FTX and Alameda are meant to be separate businesses, but the report claimed that they had close financial ties.
Binance announced on Nov. 6 that it would sell its FTT tokens “due to recent revelations.” In response, FTT’s price plummeted and traders rushed to pull out of FTX, fearful that it would be yet another fallen crypto company.
FTX scrambled to process requests for withdrawals, which amounted to an estimated $6 billion over three days. It seemed to enter a liquidity crunch, meaning it lacked the money to fulfill requests.
On Tuesday, Binance said it had reached an agreement to bail out FTX by buying the company. But, Mr. Zhao added in the announcement, “Binance has the discretion to pull out from the deal at any time.”
In a concurrent announcement, Mr. Bankman-Fried said the deal would protect customers and allow FTX to finish processing their withdrawals. He attempted to dispel rumors of conflict between FTX and Binance, adding, “we are in the best of hands.”
On Wednesday, Binance announced it would no longer buy FTX, saying it had arrived at that decision “as a result of corporate due diligence.” It also cited regulatory investigations and reports of mishandled funds.
“Every time a major player in an industry fails, retail consumers will suffer,” Binance said in a statement. “We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market.”
On Thursday, FTX announced it had reached an agreement with Tron, a blockchain platform, to swap certain tokens from FTX to other crypto wallets.
The cryptocurrency industry has long struggled to convince regulators, investors and ordinary customers that it is trustworthy. The fall of FTX, which seemed more stable than other companies, and the pullout by Binance have jolted the market.
FTT’s price has fallen about 80 percent since Tuesday. The prices of Bitcoin and Ether, some of the most valuable tokens, have both fluctuated widely since Tuesday, at one point dropping more than 20 percent.
Was it a lack of U.S. regulation? Sort of, but not really: FTX was based in the Bahamas. Should the U.S. have moved faster to create an attractive regulatory environment so companies like FTX would have moved here and had to abide by Washington’s rules? Maybe. But if the FTX case turns out to be fraud, regulation unto itself may not have been enough to stop it. Madoff didn’t live on an island beyond U.S. jurisdiction — he was based on Lexington Avenue.
If we ultimately learn that FTX’s undoing is the first of many in an industry that has been built on a pile of offshore fairy-dust leverage, the regulatory lesson will actually be the opposite: The S.E.C., C.F.T.C. and Treasury will have proved prescient for all their warnings to the public that crypto was too risky. Privately, the crypto skeptics in Washington’s regulatory complex are already pointing to FTX’s collapse more as a badge of honor than an example of a failure to stop it.
Which brings us to the investment community, a group that has long argued that the free market is the best form of regulation and venerated the charismatic founder — remember Elizabeth Holmes? — above all else. FTX proves just how high a cost that strategy may exact. The venture capitalists behind FTX failed, and the libertarian views of Silicon Valley it was based upon might need to re-evaluated. It is hard enough in this environment to raise new funds; it is likely to only become harder for crypto-focused V.C.s, several executives told me.
from
FTX, one of the world’s largest exchanges, is run by Sam Bankman-Fried and is headquartered in the Bahamas. It has spent millions of dollars lobbying American legislators to institute crypto-friendly regulation.
FTX has a native cryptocurrency token called FTT, which traders use for operations like paying transaction fees. Last year, Mr. Zhao sold his stake in FTX back to Mr. Bankman-Fried, who paid for it partially with FTT tokens.
On Nov. 2, the crypto publication CoinDesk reported on a leaked document that appeared to show that Alameda Research, a hedge fund run by Mr. Bankman-Fried, held an unusually large amount of FTT tokens. FTX and Alameda are meant to be separate businesses, but the report claimed that they had close financial ties.
Binance announced on Nov. 6 that it would sell its FTT tokens “due to recent revelations.” In response, FTT’s price plummeted and traders rushed to pull out of FTX, fearful that it would be yet another fallen crypto company.
FTX scrambled to process requests for withdrawals, which amounted to an estimated $6 billion over three days. It seemed to enter a liquidity crunch, meaning it lacked the money to fulfill requests.
On Tuesday, Binance said it had reached an agreement to bail out FTX by buying the company. But, Mr. Zhao added in the announcement, “Binance has the discretion to pull out from the deal at any time.”
In a concurrent announcement, Mr. Bankman-Fried said the deal would protect customers and allow FTX to finish processing their withdrawals. He attempted to dispel rumors of conflict between FTX and Binance, adding, “we are in the best of hands.”
On Wednesday, Binance announced it would no longer buy FTX, saying it had arrived at that decision “as a result of corporate due diligence.” It also cited regulatory investigations and reports of mishandled funds.
“Every time a major player in an industry fails, retail consumers will suffer,” Binance said in a statement. “We have seen over the last several years that the crypto ecosystem is becoming more resilient and we believe in time that outliers that misuse user funds will be weeded out by the free market.”
On Thursday, FTX announced it had reached an agreement with Tron, a blockchain platform, to swap certain tokens from FTX to other crypto wallets.
The cryptocurrency industry has long struggled to convince regulators, investors and ordinary customers that it is trustworthy. The fall of FTX, which seemed more stable than other companies, and the pullout by Binance have jolted the market.
FTT’s price has fallen about 80 percent since Tuesday. The prices of Bitcoin and Ether, some of the most valuable tokens, have both fluctuated widely since Tuesday, at one point dropping more than 20 percent.
Was it a lack of U.S. regulation? Sort of, but not really: FTX was based in the Bahamas. Should the U.S. have moved faster to create an attractive regulatory environment so companies like FTX would have moved here and had to abide by Washington’s rules? Maybe. But if the FTX case turns out to be fraud, regulation unto itself may not have been enough to stop it. Madoff didn’t live on an island beyond U.S. jurisdiction — he was based on Lexington Avenue.
If we ultimately learn that FTX’s undoing is the first of many in an industry that has been built on a pile of offshore fairy-dust leverage, the regulatory lesson will actually be the opposite: The S.E.C., C.F.T.C. and Treasury will have proved prescient for all their warnings to the public that crypto was too risky. Privately, the crypto skeptics in Washington’s regulatory complex are already pointing to FTX’s collapse more as a badge of honor than an example of a failure to stop it.
Which brings us to the investment community, a group that has long argued that the free market is the best form of regulation and venerated the charismatic founder — remember Elizabeth Holmes? — above all else. FTX proves just how high a cost that strategy may exact. The venture capitalists behind FTX failed, and the libertarian views of Silicon Valley it was based upon might need to re-evaluated. It is hard enough in this environment to raise new funds; it is likely to only become harder for crypto-focused V.C.s, several executives told me.
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