How fast things go in the world of crypto intrigue.
Two weeks ago, Sam Bankman-Fried, the founder of FTX, was still a king maker.
He certainly rubbed his peers the wrong way as he tried to influence the regulation of the sector. The industry, however, was happy to see him use his fortune to lobby lawmakers in favor of cryptocurrencies.
If he annoyed his rivals, they dared not say so in public. Even his feud with Changpeng Zhao, co-founder and CEO of Binance, the world’s largest cryptocurrency exchange by volume, remained a closely guarded industry secret.
But as soon as the king showed the first signs of weakness, they did not hesitate to take advantage of it. History will remember that it was after Zhao and Binance announced on Nov. 6 that they were going to sell $530 million worth of FTT coins, the cryptocurrency issued by FTX, that the beginning of the end came for Bankman-Fried’s empire.
“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,” Zhao wrote on Twitter.
‘We Do Not Do Anything With Your Funds’
Investors then rushed to withdraw their money from the platform. About $5 billion was withdrawn that day, causing a shortfall from which FTX would never recover.
On Nov. 9, two days before FTX filed for Chapter 11 bankruptcy, Cameron Winklevoss, who founded cryptocurrency exchange Gemini with his twin brother Tyler, fired a thinly veiled criticism at FTX.
“We do not do anything with your funds unless explicitly authorized and directed to do so by you,” he posted on Twitter. “Regulatory oversight is important as it ensures that companies like Gemini do what they say they do.”
The king down, his rivals saw the opportunity to finish him off.
Crypto billionaires were indeed the first to put Bankman-Fried on trial, now dubbed the “Bernie Madoff of crypto”. They did this by distancing themselves, presenting him as a “bad actor” and a liar, and by repeating that FTX did not reflect and represent the crypto industry.
“They lied. FTX lied. I think Sam lied to his employees, his users, his shareholders, regulators all around the world and all the users,” Zhao said during a Twitter event on Nov. 14. “So yes, he should take most of the blame.”
Zhao, who is now seen as the new savior of cryptocurrencies after announcing the creation of a fund to help struggling companies — he still hasn’t given details about the fund — had just given the signal for the slaughter to begin.
For billionaire Michael Saylor, one of the main evangelists of bitcoin, the FTX scandal is very bad publicity for the king of cryptocurrencies.
“The failure of FTX & FTT represents the collapse of a corrupt crypto-bank fueled by an inflationary fiat crypto-currency,” Saylor posted on Twitter on Nov. 14. “#Bitcoin is an incorruptible, deflationary asset and ethical network offering property rights & freedom to billions of people.”
After initially opting for caution, Brian Armstrong, the co-founder and CEO of Coinbase, no longer held back his blows against Bankman-Fried. He went so far as to find him guilty by calling him a “criminal” while the regulatory investigations are ongoing and the former trader is currently free. No charges have yet been brought against him.
“Twitter has broken just about every piece of this FTX story using blockchain analytics, while NYT is writing puff pieces on a criminal,” Armstrong posted on Twitter on Nov. 15.
The crypto billionaires club has lost one of its most influential members. Already a closed circle, the group of those who make up the young industry, has shrunk even further.
The question is why none of them sounded the alarm if they suspected that one of theirs was deceiving the general public?
“I was surprised at how much cash that they seemed to have and Sam seemed to have to go out and perform various investments in the markets, both their ventures arm and, you know, buying 9% of Robinhood and other political organizations,” Armstrong told CNBC on Nov. 10.
“I was thinking where is all this cash coming from?”
As a crypto exchange, FTX executed orders for their clients, taking their cash and buying cryptocurrencies on their behalf. FTX acted as a custodian, holding the clients’ crypto currencies.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market making. The cash FTX borrowed was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This represented a significant exposure, due to the concentration risk and the volatility of FTT.