The FTT tokens on the FTX exchange have dropped to more than 80 percent in these two days. Accounts of investors were frozen and not allowed for withdrawals. In the end, investors in FTT faced a massive loss.
The price of the coin dropped from around $22 on Monday, to less than $5, and erased over $2 trillion over just 24 hours. The result was bitcoin and Ethereum both plummeted by over 10%.
We must understand what happened to the story. However, before we do that, let us review the basics to get a greater understanding.
What is FTX?
FTX is a Bahamian crypto exchange. FTX is located within Antigua and Barbuda and is headquartered in The Bahamas. The exchange was established in the year 2019 by MIT graduates Sam Bankman-Fried and Gary Wang.
FTX offers a wide range of trading services, such as derivatives as well as volatility products, options, and leveraged tokens. The company also offers market prices with more than 300 trading pairs of cryptocurrency like BTC/USDT, USDT/ETH, XRP/USDT, as well as its own native token FTT/USDT.
There are a few things to keep in mind. FTX manages FTX US as an independent entity. The FTX and FTX USA are distinct entities.
What is the difference between FTX and FTX US?
There are a lot of differences between them. FTX is the original trading exchange founded by Sam Bankman Fried in the Bahamas which is a tax-free zone for corporates and investors. The FXT company is regulated by the Securities Commission of the Bahamas.
On the other hand, FTX US is registered under FinCEN (Financial Crimes Enforcement Network) in Miami United States with strict rules for US securities.
There are a few important differences between the branches of FTX.
|Run from The Bahamas||Run from Miami|
|Regulated by the Securities Commission of the Bahamas||Regulated by FinCEN of the United States treasury department.|
|More than 300 cryptocurrencies are available.||Only more than 30 cryptocurrencies are available.|
|Charged with FTT native token||FTT native token is not available|
|Works in the rest of the world except the US||Works only in the US, bound to US securities laws.|
What exactly is Alameda research?
Alameda Research is a Hong Kong-based private equity company created by Sam Bankman-Fried in October 2017. It has more than $1 billion worth of digital assets, and invests between one and ten billion every day, across a variety of major coins, altcoins, and their derivatives.
Alameda Research operates as a major trading company. The company provides market-making services for numerous coins on the most popular cryptocurrency exchanges.
Resignation of Sam Trabucco on August 2022
In August 2022, the CEO of Alamada research, Sam Trabucco has stepped out of the position.
As part of his resignation, he made some statements that are bold on his Twitter account. He has stated that he is ” more worthwhile to do with my time than give it to Alameda ” This has raised doubts about the operations of Alameda the hedge fund company.
Brett Harrison stepping down from FTX US on September 2022
Harrison’s tweet attracted the attention of the Federal Deposit Insurance Corporation (FDIC) in the month of July 2022.
It was claimed by the tweeter that funds held by and the stocks bought through FTX are FDIC-insured. The FDIC declared that the July tweet made false claims and should be deleted. Then Sam himself took to Twitter to apologize for the false assertions.
Later on September 20, 2022, Brett Harrison, the president of the FTX US division stepped out to an advisory post.
Later in October 2022, the Texas State Securities Board filed a lawsuit against FTX US for selling unregistered securities products in the U.S. through its yield-bearing service.
The native token game
On the 2nd of November 2022, the coin desk announced that the major stakes of Alameda research are stored as FTT tokens which are the native tokens of the FTX exchange, instead of Fiat currency or stablecoins.
In simple words, the company’s reserves largely comprise native FTT tokens more than any other valuable currency. FTT’s value is maintained through FTX’s ongoing program of purchasing tokens back and burning them and consuming about a third of the commissions paid to traders and will continue until half of the tokens are burned.
Hence, as most of Alameda’s research funds are backed with FTT tokens, the company attempted to increase the value of FTT tokens through various artificial means. As a result, the reserve value (market capitalization of the company) increased. Utilizing this value as collateral, the Alameda research, borrowed more stablecoins from the marketplace.
Sam Bankman has started investing these funds into acquiring various small companies and projects.
Raising capital through borrowing is the wrong thing to do in the field of uncertainty – cryptocurrencies. Instead, the company would have raised capital through various other methods such as attracting investors and venture capitalists.
The End game
Changpeng Zhao, commonly known as “CZ”, is a Chinese-Canadian business leader. Zhao is a co-founder and the CEO of Binance the world’s most popular cryptocurrency exchange.
CZ is an early investor in FTX in 2019. But later their relationship soured and CZ has to withdraw his investment for 2 years. As a part of the divestment, CZ received his investment in the form of dollars and FTT tokens.
Considering the news that is circulating around markets, CZ Binance tweeted on the 6th of November, that they were planning to liquidate FTT funds that they acquired through the divestment of FTX.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4— CZ 🔶 Binance (@cz_binance) November 6, 2022
As a part of divestment, CZ has sold 22,999,999 FTT token worth, 584,818,174 USD. A sudden inflow of FTT into market has created havoc which resulted in the decline of the price of FTT.
Yes, this is part of it. https://t.co/TnMSqRTutr— CZ 🔶 Binance (@cz_binance) November 6, 2022
On the otherhand, he made a statement on the twitter” Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs. Onwards.”
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won't pretend to make love after divorce. We are not against anyone. But we won't support people who lobby against other industry players behind their backs. Onwards.— CZ 🔶 Binance (@cz_binance) November 6, 2022
After the news sparked rumors regarding the credibility and reliability of FTX exchange, many began taking their money out. This led to people experiencing difficulties when withdrawing money beginning on the 7th of November and onwards. The withdrawals were completed halted by the end the day.
On 9th Nov. CZ Binance tweeted his intention to aid FTX in supplying liquidity. He has signed a non-binding statement of intent to acquire FTX but just after going through due diligence.
This afternoon, FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding LOI, intending to fully acquire https://t.co/BGtFlCmLXB and help cover the liquidity crunch. We will be conducting a full DD in the coming days.— CZ 🔶 Binance (@cz_binance) November 8, 2022
However, on the 10th of November, CZ once again announced that it had pulled its plan due to internal issues related to the regulatory process of FTX.
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f.— Binance (@binance) November 9, 2022
The investors have been panned, and the price of FTT token has fallen drastically. In the mist of twitter attacks on the decision made by CZ, he has released a public note describing his act in the entire process of FTX collapse.
So finally It will be the investors on all days, who are fucked up. We must wait and watch the future actions of Sam Bankman and his team.
1) I'm sorry. That's the biggest thing.— SBF (@SBF_FTX) November 10, 2022
I fucked up, and should have done better.
Lessons to be learned
Strict Crypto regulations
In the midst of such havoc, the FTT US division is still functioning. This tells us that strict financial laws and cryptocurrency regulations must be in force to protect the investor’s money in the first place. Countries must implement clear cryptocurrency laws and should bring them under separate securities boards for cryptocurrencies.
These regulations should not hamper the independence of a crypto investor. Their main aim should be to protect the investor’s fund and not to regulate people. Governments should consider them as an asset class, as crypto has become a regular entity in our daily lives.
So, yes! Cryptos have to be regulated. But only to an extent where we can invest our money in cryptocurrency with ease and a sense of security.
CZ’s rules for crypto survival
CZ has tweeted some interesting points regarding the sustainable long-run of crypto organizations. According to him, an organization shouldn’t use its own tokens for collateral.
He also stated not to borrow if you run a crypto business. Have a large reserve.
Two big lessons:— CZ 🔶 Binance (@cz_binance) November 8, 2022
1: Never use a token you created as collateral.
2: Don’t borrow if you run a crypto business. Don't use capital "efficiently". Have a large reserve.
Binance has never used BNB for collateral, and we have never taken on debt.
Every crypto exchange should follow the proof of reserve. They should be backed by 100 percent reserves in stable coins or fiat money.
All crypto exchanges should do merkle-tree proof-of-reserves.— CZ 🔶 Binance (@cz_binance) November 8, 2022
Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.
The recent decline of many crypto firms has created sleepless nights for investors. Let’s hope for a better crypto future.
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