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A well-known CEO who was driving the crypto industry’s push into mainstream finance saw a spectacular tumble.
A 30-year-old entrepreneur named Sam Bankman-Fried turned FTX, a cryptocurrency exchange, into a $32 billion business over the course of the previous two years. He invested hundreds of millions of dollars to support faltering cryptocurrency companies. And he became into both a frequent and appreciated presence in the hallways of Congress as well as a significant political donor to Joseph R. Biden Jr.’s presidential campaign.
Then, in a matter of days, Mr. Bankman-Fried found himself in need of bailout, mostly as a result of the rival’s tweets that questioned the stability of FTX’s firm. The tweets ultimately started a three-day bank run that cost an estimated $6 billion and plunged FTX into trouble.
Changpeng Zhao, the competitor and CEO of Binance, a larger cryptocurrency exchange, consented to save FTX. But on Wednesday, Binance abruptly said the agreement was off, casting further doubt on the future of FTX. The corporation stated in a statement that its executives’ decisions were revised owing to regulatory concerns and problems with “corporate due diligence” without providing much further context.
The breakdown of the agreement has shaken the whole cryptocurrency sector. Young cryptocurrency companies now face an existential threat as they work to win over Wall Street, government authorities, and everyday consumers with their reliability. This is because of the uncertainties surrounding the future of FTX. As word of FTX’s collapse spread, the cryptocurrency market suffered, with the values of Bitcoin and Ether both falling by more than 20% since Tuesday.
The amount that clients were able to withdraw will ultimately determine how big the hole is in FTX’s balance sheet, although a person familiar with the numbers who was not permitted to speak publicly said that it might be as high as $8 billion.
In a letter to its own investors on Wednesday night, Sequoia Capital, one of FTX’s biggest backers, stated that it now regarded its $213 million investment as being worthless. The company said that FTX was in danger of going bankrupt even though it was unsure of “the entire nature and degree” of the risk.
Professor of economics at Cornell University Eswar Prasad stated that “this instance underlines the vulnerability of the entire crypto architecture.” Even significant organizations with a strong financial reputation might have flimsy foundations that give way at the first sign of danger.
Many of the fundamental misconceptions about cryptocurrency have already been dispelled this year, and FTX’s sharp decline demonstrates that no business in this rogue, weakly regulated sector is exempt from tremendous volatility.
The foundation of FTX’s operation was a dangerous trade that is still prohibited in the US, one in which investors borrow money to stake significant sums on the future value of cryptocurrencies. However, Mr. Bankman-Fried established a more modest American subsidiary that provided more cautious trading options while pleading with American regulators to accept the riskier strategy. As the business expanded, he turned into a generous political donor, giving Mr. Biden’s 2020 campaign more than $5 million.
Binance backing out
Binance announced its decision to cancel the agreement late on Wednesday in an uncharacteristically scathing statement, claiming “mishandled customer funds” and regulatory inquiries. Investigations could not be verified, and Binance provided no additional information.
“Retail consumers would suffer every time a significant player in an industry fails“, according to Binance’s statement. “Over the past several years, we have observed that the cryptocurrency ecosystem is strengthening, and we think that in due course, outliers who abuse user funds will be eliminated by the free market.”
Regarding Binance’s withdrawal from the contract, FTX declined to comment. But Mr. Bankman-Fried sent an internal mail to staff members, in which he stated: “I’m working as swiftly as I can on next steps here. I wish I could be more clear with all of you. I absolutely understand if you want to leave and don’t hold it against you in any way.” Binance “had not previously told us or communicated those misgivings,” he continued.
In contrast to some other cryptocurrency businesses that have failed this year, FTX was virtually a household name. The naming rights to the basketball arena for the Miami Heat were purchased by Mr. Bankman-Fried after he ran an advertisement during the Super Bowl. He has about a million followers on Twitter and was profiled in almost all major news publications.
According to the cryptocurrency writer Laura Shin’s tweet from Wednesday, “it’s as if the person you thought was Hermione instead turned out to be Voldemort.”
The problem erupted after rumors that one of Mr. Bankman-enterprises Fried’s was experiencing financial difficulties spread over the weekend. The reports were repeated on Twitter by Mr. Zhao, also known online as CZ, which caused a bank run that damaged FTX.
According to Lee Reiners, a crypto specialist who instructs at Duke University Law School, “CZ performed a pincer movement. He caught us all off guard.”
FTX’s venture capitalists were unaware of Mr. Bankman-ambitions Fried’s as the company crumbled, and employees received no direction. Different businesses retreated. The chief financial officer of that American cryptocurrency exchange, Alesia Haas, stated in a blog post that “there can’t be a ‘run on the bank’ at Coinbase.” We hold customer assets in a 1:1 ratio.
Some parts of the cryptocurrency world first responded to the news that Binance will acquire FTX with cautious excitement. FTX personnel were leaving, a person with knowledge of the situation claimed, and Binance had difficulty estimating the precise magnitude of the hole in the company’s finances. As a result, issues swiftly arose.
The rise of Mr. Bankman-Fried started in 2017 with the establishment of Alameda Research, a cryptocurrency trading business that generated a fortune by taking advantage of arbitrage possibilities in the Bitcoin market. He capitalized on that achievement by founding FTX, which was first based in Hong Kong before moving to the Bahamas last year.
He also started a marketing campaign. Bill Clinton and former British Prime Minister Tony Blair both made appearances on stage at a glitzy conference that Mr. Bankman-Fried held in the Bahamas in April. He was formerly reported to be worth $24 billion by Forbes, making him the second-richest crypto entrepreneur after Mr. Zhao. Mr. Bankman-Fried promised to leave his entire fortune to charity one day.
Mr. Bankman-Fried was lauded as a hero when the cryptocurrency market fell in May. He provided a $400 million credit line to BlockFi, a crypto lending company, and lent $485 million to Voyager Digital, a struggling cryptocurrency company. According to a person with knowledge of the situation, FTX also established a presence in Washington and held discussions with the Securities and Exchange Commission about becoming registered as an exchange under the authority of the agency.
However, Mr. Bankman-Fried began to experience backlash in the sector this fall. He received criticism from cryptocurrency supporters for endorsing legislative measures that they felt were in violation of the philosophical foundations of the technology.
Then, last week, a leaked balance sheet was revealed on by the cryptocurrency publication CoinDesk, revealing that a sizable percentage of Alameda’s assets consisted of FTT, a token that FTX had created to facilitate trade on its platform. The disclosure prompted concerns that a decline in FTT’s value could render FTX and Alameda insolvent because the two companies are intertwined.
Mr. Zhao, a former FTX investor, still owned a sizable amount of FTT, which Mr. Bankman-Fried had given him in order to repurchase FTX ownership. Additionally, Mr. Zhao appeared to be losing patience with Mr. Bankman-Fried. In an apparent allusion to the attention that Binance has allegedly come under from the SEC, Mr. Bankman-Fried had joked on Twitter in October that Mr. Zhao was not permitted to enter Washington. Nothing has been done.
Mr. Zhao tweeted over the weekend that Binance would sell its FTT holdings. He steadfastly maintained that he was not making “a move against a competitor.” He contrasted the FTT token, however, with Luna, a cryptocurrency that fell in May and precipitated a larger catastrophe.
He continued on Twitter, “We won’t assist people who lobby against other industry participants behind their backs.”
The result was felt right away. Mr. Bankman-Fried tweeted that “a competitor is going against us with false rumors” as clients hurried to withdraw money.
According to two people familiar with the talks, Mr. Bankman-Fried was calling potential investors at the same time in an effort to raise money. However, one guy noted that it was unclear how much he would require. But it was evident that the stakes were high: According to the other, Mr. Bankman-Fried said that FTX was experiencing a crisis.
Mr. Bankman-Fried and Mr. Zhao reached an agreement on Tuesday. He wrote, “Binance has repeatedly demonstrated their commitment to a more decentralized global economy. We are in very capable hands.”
He issued an internal apology to the staff after the agreement fell through. He added, “I’m truly sorry that we ended up here and for my part in it. That is entirely my fault.”
In Washington, there has been interest in the meltdown. In remarks made in front of the public on Wednesday, SEC chair Gary Gensler made a reference to it. And the Commodity Futures Trading Commission is looking into the collapse of FTX, a person familiar with the matter said. A spokesman said the agency was “closely monitoring” the situation.
Mr. Bankman-Fried had been scheduled to give a talk to Goldman Sachs employees on Thursday, according to a Goldman employee familiar with the plans, but it wasn’t clear whether the event would go ahead. On Wednesday evening, a notice on FTX’s website said the company was not processing withdrawals. Alameda’s website was set to private and no longer viewable.
Mr. Bankman-Fried’s fall from grace was also reflected in the size of his fortune. According to a Bloomberg wealth index, the executive, now worth $991.5 million, is no longer a billionaire.
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