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The Ftx Contagion

Validated Individual Expert

Since Satoshi Nakamoto launched Bitcoin in 2008, cryptocurrencies have gradually crept into our lives, but they have yet to shake off the bad reputation regarding financial fraud and unethical practices.

I read this every day in the comments to my posts: many view crypto simply as an unregulated and untracked medium of exchange for the use and consumption of criminals.

Not only has the “Ftx issue” not improved the perception of blockchain in the eyes of the hard core of skeptics, but it has also negatively polarized a portion of the audience that was not opposed to crypto regardless.

Chain of lies

SBF owned everyone:

  • Chainalysis, the world’s leading blockchain analytics company took over in 2019 the anti-money laundering and KYC of Ftx but didn’t notice anything strange in the continuous flow of assets between Alameda and Ftx.
  • Investors, such as Sequoia, ready to entrust him with sums exceeding $200 million, decided in river meetings while Sam was intent on finishing league of legends: not bad for a quest haul, wouldn’t you say?
  • Ordinary people, like retired Ontario teachers, who obviously had put their trust in the $95 million fund invested in Ftx
  • CZ, who had first put their trust in this stoned version of Sideshow Bob, buying him the equivalent of $580 million in FTT, only to dump everything (in good faith or not)
  • The journalists at Coindesk, a subsidiary of DCG, who with their November investigation got the parent company in trouble, while at the same time doing the job that Chainalysis had failed (or refused) to do
  • (Closing the chain)Digital Currency Group, which we now know has heavy exposure with FTX on the order of a million dollars, gave a hefty sum to the Chainalysis firm to be audited too

BCZ (Before Changpeng Zhao)

For those who had lived on the LUNA until now (not that things change much on TERRA), here are the highlights of Ftx’s collapse.

It all began on November 2, 2022, when CoinDesk dropped the load, revealing some “shady business” going on at Alameda Research: of the $14.6 billion in assets held by the company at the time, FTX’s FTT token accounted for $3.66 billion unlocked and $2.16 billion in collaterals. It was already suspicious enough that SBF were the founder of both companies, but at this point, it was clear that Alameda could not hold all these FTTs while, at the same time, the amount circulating remained the same.

It was quick to do 2+2 (meaning 3.66+2.16)

SBF was conducting fractional lending to dip into the accounts of FTX users, take their FTT holdings, and use them to fund Alameda. Alameda, in turn, would then redistribute the refurbished FTT to numerous Web3 projects it had invested in, relying on the Alameda AMM protocol to receive liquidity.

A month later, a huge excel sheet with Alameda’s venture capital portfolio was leaked, full of names and figures that seemed randomly generated, and maybe they were!

Flick of the Tweet

All in all, it was still fun and (GRP) games until on November 6, 2022, Binance CEO Changpeng Zhao announced on twitter that he would be liquidating all of Binance’s FTT holdings.

This tweet set off a two-day bank run, with panicked customers scrambling to withdraw their holdings from FTX. Within 48 hours, requested withdrawal amounts totaled a staggering $6 billion, coincidentally slightly more than those who, at the very least, were missing from the roll call.

FTX paused all user withdrawals on November 8, 2022, but it was too little, too late: it was now clear as day that FTX had been using customer assets to fund Alameda and that the exchange was insolvent. Bahamian regulatory authorities stepped in and seized the remaining assets of FTX, freezing all activity on the exchange.

The situation was so desperate that SBF accepted a non-binding takeover agreement from Binance, but it foundered within hours, as soon as CZ realized that the whole picture was falling apart. In one week, upwards of $9 billion in user assets had been lost.

On November 10th, during a Twitter Space Live event featuring Mario Nawfal and Wendy Wang, the director of international affairs at Huobi, it was revealed that SBF had dumped 285 million UST in order to take out LUNA, then took out 3AC, a competitor of Alameda and user funds from FTX to support Alameda after the collapse of 3AC that he had caused. CZ, the CEO of Binance, was reportedly aware of these actions and had questioned SBF, who has always turned a deaf ear.

As in a mexican standoff CZ, SBF and DK (Do Kwon) went at each other’s throats, with SBF accusing CZ of lying and threatening to walk away from the deal at the last minute. CZ, on the other hand, insisted that no one “won” and that the situation was not a competition. DK also accused SBF of collapsing the entire TERRA/LUNA ecosystem for his own personal pleasure.

Super Size me and Rats

Being a movie buff, I couldn’t help but notice how Morgan Spurlock’s two most successful films, Super Size Me (2004) and Rats (2016), are actually enlightened allegories about the crypto world that was to come.

During a bull market, the value of cryptocurrencies and crypto-assets are on the rise, leading to inflated account balances and a sense of gluttony among investors. Similarly, in Super Size Me, people were indulging in unhealthy food without much concern for the consequences and the future(s).

In a bear market, on the other hand, when resources are scarce, investors and the companies themselves, begin to attack each other, wrecking all the fine talk about marching together toward a better future, just as in Rats. The Exterminator, with ill-concealed pleasure, locks the rats in the attic and they, with no way out, begin to eat each other, down to the last mouse.

The rekt continuum

  • Sequoia is one of the largest venture capital firms, with investments in more than 500 companies scattered around the world, and as we mentioned earlier, it entrusted Sam Bankman-Fried with $214 million “written down to zero”: that is when the prospect of easy money makes you ignore every red flag
  • Multicoin Capital is an investment firm specializing in cryptocurrency based in San Francisco, California. It was founded in 2018 by Kyle Samani and Tushar Jain and has a portfolio of projects ranging from Bitcoin to Ethereum and other cryptocurrencies with an exposure towards Ftx for $863 million
  • Paradigm is a venture capital firm based in San Francisco, California. It was founded in 2018 by Fred Ehrsam, Matt Huang and Linda Xie and has a portfolio of more than 25 projects worldwide, including some of the largest cryptocurrency companies such as Coinbase and Ripple. They put their trust in Ftx by investing $278 million.
  • Just when you thought you were embarking on a grand journey to success, the winds of fate take you on a voyage straight to failure: this is the fate of the crypto broker Voyager Digital.The company, after going bankrupt in July of 2022 due to the collapse of 3AC, had a controversial and unfair takeover by Ftx underway, but all plans fell apart with the arrest of SBF. Perhaps all is not lost, and a deal for the $1bn acquisition by Binance appears to be on the home stretch, although it was at first opposed by the Sec.
  • Digital Surge, an Australian cryptocurrency exchange, had $23.4 million in digital assets on the FTX platform. The platform’s founders Daniel Rutter and Josh Lehman, after suspending withdrawals on Nov. 15, proposed a deed of corporate settlement that includes creditors’ approval and their contribution of $1 million to help repay customers. The plan was approved by creditors and provides for a loan of 1.25 million Australian dollars to continue the exchange’s operations and reimburse users.
  • The trading firm Auros, despite trying for weeks to maintain operations through a series of loans and financial arrangements, failed to plug the $320 million hole left by Ftx and fil(l)ed for bankruptcy protection on Dec. 20 at the British Virgin Islands.
  • Orthogonal Trading, a hedge fund based in Sydney, has defaulted on a $10 million crypto loan due to the collapse of FTX and associated trading activities. The lender, M11 Credit, which runs the lending pool on DeFi protocol Maple, has issued a notice of default for all of the fund’s active borrowings and severed ties with Orthogonal Trading due to the hedge fund misrepresenting its financial position to M11 Credit.
  • For Hodlnaut, things were already looking bad in August when various exposures to Terra put the investment platform in “creditor protection.” Things could not get any better with the Ftx bankruptcy, to which the hapless Hodlnauts were exposed for 13 million
  • Vauld, a crypto lender, got off scot-free by rejecting a proposed takeover by Nexo, but still found no way to save itself: the pre-existing $402 million hole was joined by an additional $10 million that had been entrusted to Ftx: liquidity is just over $46 million

Have your lollipop and eat it

The feud between Gemini Co-Founder Cameron Winklevoss and Digital Currency Group (DCG) CEO Barry Silbert has been escalating since the Ftx crash. Winklevoss accused Silbert of using $1.675 billion of money he claims DCG “owes” Genesis and using it for purposes that helped DCG, rather than Genesis. This dispute centers around a loan Gemini provided to Genesis Global Capital, a subsidiary of DCG. The loan was used to provide capital to the troubled brokerage.

Gemini has accused DCG of using the loan for purposes other than what it was intended for, while DCG has stated that the funds were used to shore up the liquidity of the firm and that Genesis is a separate entity.

Barry Silbert only admitted the $1.675bn loan, with the first 575 million tranche due in May, and the other in June(2032)

Gemini has demanded that DCG return the funds, and has also threatened legal action. The situation is still ongoing, with both sides continuing to trade accusations and counter-accusations.

In short:

  • Genesis declared bankrupt while Gemini accused DCG (the parent company of Genesis) of failing to repay a $900 billion loan
  • At the same time, DCG owes $1.675bn to Genesis
  • But they act as Pontius Pilate
  • Maybe DCG siphoned out the funds that Genesis had received on loan from Gemini, only to have it go bankrupt?
  • If things didn’t turn out that way, I don’t think I went that far.

See no evil, hear no evil

It has recently emerged that Goldman Sachs and Jp Morgan (yes, the very ones who have been pouncing on cryptos for years) have also been burned by Ftx.

Also included in the list of creditors that have been leaked (this time there are 1.6 million whose top 50 owed more than $3 billion) are Apple, Netflix and Meta.

None of them have claimed any.

Shysters!

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