[Originally Published November 11, 2022]
What a whirlwind of a 24-hour news cycle. Once thought to be a white knight fighting the good fight, in the cryptocurrency space, Sam Bankman-Fried’s “Emperor Has No Clothes” moment is surely to catch the eye of the SEC.
After the recent show trial against LBRY Inc, the SEC has demonstrated an aggressive stance towards what it views as “money-imitators.” the $LBC token that LBRY Inc sold was deemed to have been a security, and there will be fallout from that decision.
If you’re doing any business with an entity that is not a financial institution with FDIC-backed insurance, beware of rug-pulls. The FDIC was created specifically for this purpose; to insure the first $250,000 of customer deposits, and in a less-direct way, protect the banks from runs.
If people feel that their money is secure in a bank, then there is a level of trust between individual and their bank. However, if there is no trust between two parties, then what incentive is there, to use a service? What about one that claims to do something like offer interest rates on deposits that pays more than 3-4% a year?
The reason why FTX got so big was due to human greed. Greed for money, wealth, power, and political influence. Things that money can easily buy, but things that are also very easy to lose. If you go against the grain, you will be fought. If you go with the flow, you’ll get caught up with the Joneses, spending money you don’t have on things you don’t need, to impress people who you don’t like, and most likely don’t know, who couldn’t care less about you.
The viscous loop of consumer capitalism draws people in, and they get greedy once they start to see the money flow.
It’s weird how there can be such blatant conflicts-of-interest between multi-billion-dollar business enterprises, and no one seemed to bat an eye. Sam Bankman-Fried created both Alameda Research, a trading firm, and FTX, the centralized cryptocurrency exchange.
It appears, from an outsider’s perspective, that he was attempting to corner the cryptocurrency market. By providing an exchange for users to provide liquidity-for-passive-income, trade crypto-for-crypto, and lend crypto deposits, SBF created an ecosystem that covered the major money-makers for businesses in the industry. Trading fees on their own, wasn’t enough though.
FTX chose to create its own token, $FTT, which in the past 4 days, has lost nearly 86% of its value versus Bitcoin. Eventually all ponzi schemes will be revealed, and the fallout will continue.
The problem with creating your own collateral, is the lack of backing. Since the US Dollar has nothing backing it in resources (ie: gold, silver, lithium or oil) its value gets inflated and deflated by the amount of Dollar-denominated debt that is demanded by the market. The more debt that is created, the more will need to be paid back, with interest.
Since central banks are involved in the global financial system, they have a role in providing “liquidity” to facilitate exchanges between fiat currencies.
The way the debt-based system survives?
You guessed it! More debt! Unfortunately, creating lots more debt will result in an ever-increasing cost-of-capital, and at some point, the debt will become too expensive to pay back. Some degree of liquidation usually takes place after the bubble pops.
That’s where we found ourselves on November 10th, 2022. A liquidation event has clearly taken place, Bitcoin’s price reacted to the selling pressure by dumping all the way down to just above $15,000, the lowest level in 2 years. The value of the FTX Token ($FTT) is $2.72 as of 3:30 pm CT, November 11, 2022, down nearly 88% in the last 5 days.
Clearly, we have seen the implosion of FTX, which, according to it’s now-former CEO, Sam Bankman-Fried, all withdrawals at FTX US would remain open. Well that was a lie, they shutdown withdrawals entirely for all FTX customers except from the Bahamas.
A special tax loophole enabled withdrawals, and there became a flood of users on Crypto Twitter scrambling to get their identifications verified for the Bahamas so they could withdraw the funds they’d deposited on FTX’s platform. It’s a tell-tale sign of insolvency when a trading firm halts withdrawals. It means the music has been turned off.
So the party known as FTX has stopped, but, what about Alameda Research? The sister trading firm to the main FTX cryptocurrency exchange company had over $14 billion in supposed assets in May, earlier this year, so what happened?
Well, we have a classic case of fraud, let me explain:
FTX printed $FTT tokens, which it then lent to Alameda Research (with interest), who then used those loaned $FTT tokens to swap for stablecoins, such as USDT and USDC, to gain further yield. Well, a lot of those $FTT tokens were locked up, making them illiquid, which wound up leading to a liquidity crisis.
Alameda was trying to “make” the markets in a lot of ways. Their goal was to facilitate as much of the cryptocurrency-for-cryptocurrency exchange market activity as they possibly could, this came at the price of their entire operation.
Bankman-Fried claims to have not known about the amount of leverage his firm was taking on. I find that very hard to believe, since he oversaw the activities of FTX, and his former girlfriend is the CEO of Alameda Research. There’s far too much conflict-of-interest here for that to be a coincidence.
Losing $10 billion of customer funds, without any insurance, isn’t going to necessarily hurt SBF any more than it already has, but the people who trusted him, and his business, are the ones left holding the bag.
When Terra melted down and UST de-pegged from the US Dollar, tens of billions of dollars were lost in the immediate aftermath. Then, the big liquidations hit, once the narratives started coming out of the woodwork. 3 Arrows Capital (3AC) had become insolvent, losing billions. The c-suite have yet to be held to account.
Voyager Digital loaned out money to 3 Arrows, and to facilitate that, failed to confirm the eligibility of 3AC’s own balance sheet. Voyager lost over $600M in funds loaned to 3AC, and filed for Chapter 11 Bankruptcy Protection.
With the insolvency of FTX, Voyager has re-entered the auction space to sell off its assets to pay down its debts. According to Voyager’s filing today, (source):
The reclamation of 6500 BTC and 50,000 ETH only led to the recovery of about $164 million. Voyager had over $1 billion in user funds that have been up in the air since they halted withdrawals following the 3AC implosion.
The point of sharing this filing from Voyager Digital is to show that even months later, after the Terra collapse, the fallout is still surfacing. Alameda Research was named as a large holder of LUNA and UST leading up to the de-pegging event.
This is not the end of the fallout, only the beginning of the next unraveling.
Until next time!