Dominos Falling In FTX Collapse
As a child, you may have lined dominos up in a row and pushed one over to watch the rest of them fall in turn. If so, I have some ideas on the impact of the collapse this month of cryptocurrency exchange FTX and Alameda Research, a related crypto trading company.
The dominos falling in this collapse reach beyond the two companies involved. In fact, the damage runs throughout the crypto world and beyond.
IMPACT ON PENSIONS AND OTHER INSTITUTIONAL INVESTORS
Large institutional investors handling pensions and retirement funds have invested in FTX directly or through venture capital funds. Most of those firms contend that their investments in the exchange were a fraction of total funds. As a result, they say losses are minimal.
The Ontario Teachers’ Pension Plan is one of Canada’s largest retirement funds. It was a direct investor in FTX. As a result of the collapse, the plan announced Friday that it will write off the $95 million it had invested in FTX.
In addition, some institutions invested through funds. The Alaska Permanent Fund Corp; Washington State Investment Board and several other institutions invested in Sequoia Capital, which in turn invested in FTX.
Institutional Venture Partners fund also invested client funds in FTX. Among those clients are the Tennessee Consolidated Retirement System; the City and County of San Francisco Employees’ Retirement System; the Maryland State Retirement & Pension System; and Alaska Permanent Fund Corp.
Illinois Municipal Retirement Fund was invested in FTX through Lightspeed Venture Partners.
Rise and Fall
Sam Bankman-Fried owned FTX and Alameda. He was regarded by many as a crypto wunderkind. Through his ownership of those two companies, he was a billionaire at 30.
At least, that was the case at the beginning of November. Within a few days, he was no longer a billionaire. Mid-way through the month, his companies were in bankruptcy and criminal investigations had begun.
What Went Wrong
On November 2, CoinDesk reported on irregularities in Alameda’s balance sheet. Those irregularities included the assertion that “Alameda rests on a foundation largely made up of a coin (FTX’s FTT) that a sister company invented.”
The following Sunday, rival crypto exchange Binance announced it was selling its FTT coins valued at the time at half a billion dollars. That led to a run in which investors began pulling tokens out of the exchange.
“In the last 72 hours, we’ve had roughly $6b of net withdrawals from FTX,” Bankman-Fried wrote in a memo to employees the following Tuesday.
Binance CEO Changpeng Zhao, then announced his firm had reached an agreement to buy FTX. However, the next day Zhao withdrew the offer.
By Nov. 11, FTX announced it had filed for bankruptcy. That Chapter 11 filing included Alameda and FTX.US. FTX.US is an FTX crypto exchange based in the United States. FTX is based in the Bahamas.
The same day, FTX and FTX.US wallets were hacked and drained of over $600 million dollars.
The FTX bankruptcy is being handled by attorney John J. Ray lll. This isn’t his first rodeo. He handled the liquidation of Enron, Nortel, and Residential Capital among others.
Serving as the new FTX CEO, Ray issued a stark assessment of FTX’s management.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray wrote in a Delaware Bankruptcy filing Thursday. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
Ray says records were in such disarray that as of Nov. 11 there was no record of who was then working for the company.
Corporate funds were “used to purchase homes and other personal items for employees and advisors,” said Ray. In addition, Ray says, there is no record of those employees having to repay the company for those purchases.
In an interview with Vox via Twitter, Bankman-Fried feigned ignorance and confessed hypocrisy.
Bankman-Fried maintains FTX never used depositors’ money to invest. He insisted FTX loaned depositors’ money to Alameda – which it invested. That is a stretch that may not hold up in court.
Asked why he did not realize Alameda was overborrowing, Bankman-Fried said, “Sometimes life creeps up on you.”
The former CEO admits “messy accounting” was to blame for customers’ deposits being lent to Alameda.
Bankman-Fried positioned himself as a champion of regulation for crypto. However, in the Vox Twitter exchange, he admits that it was a sham.
“All the dumb s**t I said. It’s not true, not really.”
While riding high, Bankman-Fried was often referred to by his initials — SBF. However, with depositors losing billions, he may be known in the future as FBS.
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