How FTX’s own token was the last nail in his coffin
Like many other centralized cryptocurrency exchanges, FTX issued FTT after launching in 2019.
For a while, FTT was a massive source of growth and revenue for FTX. Investors bought into FTT’s idea as FTX offered rewards including trading discounts and VIP status on its website in exchange for owning the token. Investors were also promised “guaranteed liquidity” by disgraced FTX founder Sam Bankman-Fried, suggesting the risk of a purchase was next to non-existent. But as it turns out, the risk was actually super high — a fact that’s now staggeringly clear.
FTT was apparently used by Bankman-Fried to prop up its cryptocurrency exchange and its sister trading firm Alameda Research, leading to the system’s demise.
So how did this all happen?
The collapse
Although Bankman-Fried and Alameda Research CEO Caroline Ellison swore up and down that their companies were very separate, they were both very intertwined.
Reports from CoinDesk initially found this to be the case, revealing that Alameda did in fact own a significant amount of FTT and, as of March 30,
This is bad for a number of reasons — most notably since Alameda used the FTT as collateral for loans it took out.
“If the exchange issues a large number of tokens and holds them on its balance sheet, only offers a small number of those tokens for trading – restricting ‘free float’, which can lead to an artificially high valuation – and the blocked tokens continue to use its balance sheet as collateral for loans, this creates systemic risk as the paper value of the collateral is not real,” said Matt Hougan, CIO at Bitwise Asset Management wealth by email. “If the loans are called, the exchange may default.”
It’s essentially about “using printed money to access hard money,” said Michael Safai, a founding partner at Dexterity Capital. “The fates of the token price, credit and financial health of the company will become intertwined, which will accelerate their demise in a downturn. Even then, it’s just not a good idea, which is why investors, realizing the magnitude, were quick to activate the FTT.”
Indeed, according to the CoinDesk report, CEO of Binance Changpeng “CZ” Zhao announced He would “liquidate all remaining FTT holdings on our books” citing “recent revelations that have come to light”.
Anxious, investors rushed to withdraw their money from FTX, sparking a $6 billion bank run. FTX failed to support itself and halted withdrawals. Days later, FTX filed for bankruptcy. It turns out that Alameda couldn’t repay the lenders when FTT’s price fell, and FTX used customer funds to do it.
Though its creator is out of service, FTT currently trades for around $1, down 98% from its 2021 all-time high.
“Poor risk management and misconduct”
How FTX has used FTT is evidently a case of “poor risk management and client money misconduct,” said Youwei Yang, chief economist at BTCM.
For starters, Aaron Jacob, Head of Accounting Solutions at TaxBit said, “FTX has recognized FTT created but not issued as an asset on its balance sheet, which is very questionable accounting as FTX could create these tokens at will. It’s also hard to argue that the overall value of these tokens was reasonable on its balance sheet because if FTX had attempted to liquidate, the price would have plummeted.”
Furthermore, due to the close, undisclosed relationship between FTX and Alameda and their related transactions, the two could “essentially manipulate both the supply and demand of the token and therefore the price,” Jacob added.
Does this mean that other native token exchanges, like Binance and its BNB token, are similarly at risk of collapse?
“The only way the FTS situation could happen to BNB would be if Binance makes the same mistake by strongly resenting it,” said Lucas Outumuro, head of research at IntoTheBlock. “It seems unlikely, especially given current market conditions, and it would be an even bigger black swan event.”
Overall, tokens issued by exchanges may not pose systemic risk to an exchange or crypto in general, but that doesn’t necessarily mean they’re good investments or risk-free.
“Just because there aren’t any automatically Risk of an exchange issuing a token does not mean everything is fine. There is a concern that an exchange will issue thisKen will do it Things with it that create systemic risk,” said Bitwise’s Hougan wealth. “In the current crypto atmosphere, investors are right to ask questions of exchanges that have tokens because they don’t know what the exchange is doing behind the scenes.”
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