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Is FTX CEO Sam Bankman-Fried the Elizabeth Holmes or Bill Hwang of crypto?
After fellow exchange Binance wiggled out of a deal to acquire the firm earlier this week (and backstop its massive losses), FTX finds itself seriously short on cash -- be it real dollars, cryptocurrencies, or otherwise. Worse, details are emerging that Bankman-Fried tapped users' assets to fund risky bets via affiliated quant trading firm Alameda Research, sources told The Wall Street Journal.
Panic at the Crypto
If you're the type who's inclined to call the entire cryptocurrency revolution a fly by-night scam built on a house of cards constructed by in-over-their-head hucksters and propped up by immature amateur investors, then, well, please read on. Bankman-Fried, whose FTX is domiciled in the Bahamas, has helped steer a $32 billion company into one on the brink of insolvency in less than a year.
Typically, exchanges like FTX make money solely by capturing big-ask spreads on crypto trades. According to the WSJ, FTX has engaged in far riskier crypto trading behavior – namely, lending $10 billion of its $16 billion in customer assets to Alameda, which went on to engage in speculative trading.
Conditions at the exchange started to crumble when crypto news publication CoinDesk reported last week just how intertwined the two companies are. The report revealed that much of Alameda's balance sheet is dominated not by bitcoin or even fiat currency but by the FTT token -- an asset FTX invented. The revelation triggered an old-fashioned run on the blockchain. Users slammed the exchange with $5 billion worth of withdrawal requests on Sunday. FTX quickly paused withdrawal requests but by Wednesday Bankman-Fried told investors the firm faced a shortfall of $8 billion, sources told CNBC.
Now, the 30-year-old CEO is searching for a liferaft:
- Binance promptly backed out of the proposed acquisition while ominously claiming the firm's problems were "beyond our control or ability to help." Sequoia Capital, a backer of FTX, announced Wednesday it is writing off its roughly $210 million investment in the company to zero.
- Bankman-Fried reportedly reached out to OKX, another exchange, earlier this week for help. OKX is waiting for more information before it makes any decision. "The goal of this raise will be first to [do] right by customers; second by current and possible new investors; third of all you guys," Bankman-Fried told FTX staff this week, according to the WSJ.
Insecure: Unlike traditional market brokers, it's unclear whether crypto exchanges are on the hook for misusing customer funds, meaning regulators may have no authority to help make customers whole. Hey crypto kids, it may be time to acquaint yourself with a couple of throwbacks known as the CFTC and the SEC.