FTX Crashes — The Fall of a Crypto Giant, Corporate Rivalry Or Corporate Mismanagement
FTX is a global crypto giant renowned for its cryptocurrency trading services, headquartered in the Bahamas. This multinational cryptocurrency exchange has dominated the crypto market as one of the key players with over a million active users. As one of the top players in the crypto space, this firm has held the power to dictate the rise and fall of any token as well as the overall market course in general.
This firm has been in the news recently hinting at its collapse and a possible hostile takeover incident. It is important to follow its proceedings because this event is yet another highlight of the cons of centralisation existing in the digital currency finance space as the irony here is that the firm is now on a collapse precisely because of its centralisation and custodial service practices.
As one of the top players in the cryptocurrency Centralised Financial (CEFI) services market, the firm has always had a strong rivalry with another cryptocurrency CEFI giant — Binance. Binance is the largest cryptocurrency exchange in the world on the basis of daily trading volume and has been active since 2017. Both firms have always trail-blazed and dictated various innovations and dictated the direction of the flow of market value of various tokens. But, Binance and its founder strictly advocated remaining away from any sort of regulatory influence while FTX and its founder was a well-known advocate for bringing regulatory infrastructure into the crypto space. Due to the difference in opinion between the founders of these two firms as well as a rivalry with each other as top competitors, they have often taken a dig at each other directly and indirectly. And this time, what started out as a Twitter squabble between two CEOs turned out into one of the most cut-throat business moves (hostile takeover/sabotage) of the decade.
What happened?
As a centralised entity in a decentralised industry, both Binance and FTX follow custodial service-based business practices. And this worked out well for the most part for both parties until recently when news surfaced of FTX’s collapse. One of the most recent examples of such a market-influencing event is FTX stepping to prevent the collapse of various crypto projects such as BlockFi, Voyager Digital, and Celsius during the sharp bearish downturn earlier this year. But now, even FTX needs someone else to step in to prevent its collapse.
It remains to be seen who will step in and how the firm will be saved or if the firm will be saved at all. So what led to the collapse of such a huge mega-crypto-giant? How did a squabble between two people result in the collapse of a multi-billion dollar company? There are numerous speculations as to what led to this incident such as internal mismanagement, corporate sabotage and sharp increase in sudden fund withdrawals over market fears.
It should be noted that this firm is not the first to suffer such a fate. This year, the crypto industry has seen various centralised business entities collapse partially or completely either due to corporate negligence or due to loss of tokens in form of bridge exploits and wallet hacks.
Let’s break down the timeline of how the collapse started and what reasons are stated to have led to this incident. While this may seem like an issue which happened overnight, the factors that led to the collapse of the firm had actually taken shape in two stages. The first stage could be viewed as inconsequential or irrelevant while the second stage had more of a direct impact.
The first stage — Build up of Rivalry
Mr Zhao and Mr Fried met back in 2019 about six months after the launch of FTX. Back then, Mr Zhao acquired a 20% stake in FTX when it started out as a cryptocurrency derivatives exchange. This deal was made via Binance when the firm also decided to invest heavily in its token FTT in a long-term position alongside listing the token in its exchange. But, the relationship between CZ and Sam began to sour in less than two years as FTX’s sudden rise as a crypto trading giant was beginning to be viewed by CZ as a threat to Binance’s market domination.
Tensions escalated further when FTX tried to acquire a license in Gibraltar for a subsidiary. The regulatory entity of Gibraltar requested the FTX to submit information on all of its major shareholders. But, a repeated stonewalling attempt from Binance on providing Mr Zhao’s details delayed the licensing process, resulting in Mr Fried re-acquiring Binance’s 20% stake in the firm for $2 Billion USD and acquiring the license in Gibraltar. But, a part of the payment for this deal was financed by Mr Zhao in the form of FTX’s FTT tokens. This added to the already existing huge volume of FTT tokens held by Binance in its long-term positions. This event plays a major role as an indirect influence in the collapse of FTX.
The Second Stage — Alameda Research Leaks and Binance’s Sale of FTT tokens
The second part begins with news of the illiquid situation in FTX from a leaked Alameda Research document last week. The news pointed out that much of the Alameda Research firm’s assets are in the form of FTT tokens issued by FTX. Alameda is the trading firm of Sam who co-founded FTX instead of other third-party tokens or fiat currencies. While it was said that there were few other tokens in its possession, most of its assets were locked in form of tokens from the firms which Alameda helped bail out from the bearish run earlier this year.
Shortly after this news was released, CZ tweeted that Binance would now liquidate its FTT holdings which it received as part of the payment from Mr Fried when FTX reacquired its stake from Binance in 2021. Further, reports from Etherscan — a blockchain explorer showed the transfer of nearly 23 Million FTX tokens to a Binance wallet which gave rise to a bear wave triggering a sharp sell-off of FTT tokens alongside FTT’s huge decline in market value.
Alameda’s CEO Caroline clarified that the firm still held $10 Billion worth of assets that were not listed on the balance sheet which was leaked and further offered to buy out Binance’s FTT tokens for $22. But this failed to have any visible impact as the market began this week. As Solana and it’s few project-based tokens were one of the largest third-party tokens held by the firm aside from FTT, SOL tokens and a few other Solana ecosystem-based tokens also suffered a sharp drop in price. Meanwhile, the impact of news around U.S. mid-term elections given SAM’s huge contribution to various election campaigns and reports which showed FTX’s bitcoin holdings nearly becoming empty increased the bearish influence in the market.
This contagion of a new huge bearish market wave resulted in many investors deciding to pull out their funds from the FTX exchange. A huge and sudden surge in withdrawal requests resulted in the FTX exchange. This created a huge backlog with requests totalling around US$ 6 billion being raised in less than 72 hours. Given, the higher-than-average withdrawal request, the exchange has halted any withdrawal besides fiat as per an update from the FTX telegram support group. Meanwhile, the Alameda leaks led a bearish wave that seems to have crossed over from just FTT and Solana tokens and impacted Bitcoin and other major tokens as well resulting in overall bearish market conditions.
Outcome
Due to an apparent lack of funds to process withdrawal requests, Mr Fried was forced to look for funding from investors and third-party entities. So far, this has yet to yield any positive results. Sam managed to finalise a back-door deal with his rival CZ to sell FTX to Binance, but the deal fell through as binance claimed that its due diligence showed FTX mishandled its clients’ funds. There are also speculations that the deal fell through because CZ wanted to avoid anti-trust concerns as this deal would open up Binance to further exposure to regulatory entities. It is now said that FTX continues to look for funds to save the exchange from sinking further while its CEO Mr Fried is doing his best to source funds from investors.
This incident has yet again proved the cons that come along with a centralised environment in cryptocurrency and how it is affecting the users. Simple tweets continue to set off major directional waves in the market as these continue to use the tokens in their possession to manipulate the market to their whims.
CZ’s move could be viewed as a cut-throat corporate strategy to further his goals. It was his move to tweet and sell off massive volumes of tokens in short term in an open market that aided this bearish wave to gain huge momentum. But is his move to quash his business rival really to be blamed? This can only be attributed to improper management of assets in FTX which helped CZ exploit the opportunity.
Some of the mistakes on the FTX side commonly agreed by the crypto market in general include — usage of their own assets as collateral, inappropriate handling of clients’ funds between FTX and Alameda, Inflated balance sheets and inability to pay the customers which are often associated with scams.
This incident and many from the recent past have clearly reiterated that a centralised entity with custodial capabilities in the crypto space clearly has the ability to affect market momentum as well as result in huge losses/inappropriate usage of the client’s assets. Given the decentralised nature of crypto assets, it is better to choose a decentralized crypto market for using their finance and choosing reliable projects and platforms with better use case scenarios to invest in order to increase the safety of funds.
Why Choose DeFi?
Decentralised Finance (DeFi) is a non-custodial and non-centralised financial market where transactions take place peer-to-peer.
In a non-custodial environment, the user retains ownership and control over their assets at all times be it when making a swap or when using them as collateral for lend and borrow activities and other financial transactions.
In a non-centralised market, though the tokens held by the users and their prices continue to be influenced by market fluctuations, under no circumstance would the assets held by the user be at risk as they would continue to reside in the user’s wallets, safe and sound. The billions in lost deposits due to the FTX collapse would never happen in DeFi.
Better liquidity management — advanced solutions such as cross-chain transactions enabled by bridges and neutral third-party-based liquidity aggregation solutions help avoid liquidity crunch when making transactions.
Kana Labs is a good place to start your DeFi activities. We are a multi-platform supporting, cross-chain solution featuring DeFi super app with aggregation capabilities for swap, lend and borrow activities. We also have enabled testnet for swap aggregation so that users can use it to learn about DeFi, aggregation and token swaps as well, without the risk of losing any funds.
We currently support Aptos, Solana and Neon EVM with work in progress to add more blockchain ecosystems to our product suite. Fast transaction, low fee, a wide range of token availability and a multi-protocol integrated multi-chain mobile crypto wallet app with an easy-to-use UI/UX makes your experience in our app simple and seamless. To try out our product suite, please visit -> https://kanalabs.io/
