Two friends were walking into Town with a barrel of wine. The road was dusty, their walk surrounded by bright fields of yellow flowers. It was mid-July and the sun was warming their backs. “I reckon we could make a decent amount from this you know” said one, patting the side of the barrel. The other grunted in agreement, sweat beading at his temples around the brim of his hat. Halfway through their journey, they came to a tree. It overhung a small, enticing patch of shade. As they flopped down, one felt a coin in their pocket. “Hey, I’m thirsty. If I give you this coin, can I have a cup of wine” The other looked over and nodded, taking the coin and putting in his pocket. Soon, he himself became thirsty. He said “Could I buy a cup of wine off you with this coin?” The other agreed. This continued until they drunk the whole barrel dry.
So what does this have to do with what happened to FTX?

The Dream
FTX was one of the biggest trading platforms for Cryptocurrencies. It offered streamlined services to purchase different types of crypto with cold hard cash. You had access to data to help you trade and a wallet to store your funds. The company was valued at $33 billion dollars. Its investors included some huge funds, big names like Sequoia and Softbank. And in November 2022, they filed for bankruptcy.

The first domino fell after a report was leaked on the digital currency news specialist CoinDesk. The report was damning. It suggested that FTX was taking the fiat (or normal) currency that users put in to buy their new cryptocurrency tokens, and then they were using those normal funds to invest in assets. This is normal, banks do this. However, the report suggested that behind the scenes, FTX was not backing the funds that users were pouring in on a 1:1 basis. Moreover, the assets that FTX was investing were not liquid, meaning that users wouldn’t be able to get their money out if there was a “run on the bank” (that is to say, if everyone tried to get their money out all at once).
The Reality
This is a problem for normal banks too. In 2019, there was a liquidity crisis in Lebanon. The country was floundering, unable to secure foreign investment. This lead to a widespread fear that the country would not be able to pay its debts, which were rapidly maturing. The value of the Lebanese Pound (£L) developed its own black market value, divergent from the official exchange rate. The inflation was incredible.
Over the course of a few years, the black market value of $1 in Lebanese Pound increased from £L1,600 to over £L15,000. To make matters worse, the Lebanese central bank printed 266% more bills from 2019. It was a disaster and in October 2019, there were huge protests. In response, the banks closed their doors and banned people from accessing their savings for an unprecedented 2 weeks. When they opened, they only allowed customers to take money out in the local currency (rather than in dollars), to widespread anger and desperation. To this day, the country is in shock, with enforced blackouts and shortages of vital medicines. In September 2022, the banks closed again for 3 days as depositors raided them to try and access their money.

The Nightmare
So this sort of problem is not unprecedented in the financial world. However, this is where things start to become more sinister. To understand what happened to FTX, it’s important to look at who owned it. Sam Bankman-Fried is a crypto golden boy and was the brains (and founder) of both FTX and another company, called Alameda Research. Alameda Research was an investment firm that specialised in crypto assets. The document released by CoinDesk suggested that Alameda Research held a large amount of the FTT token (which was FTX’s own cryptocurrency). Moreover, Alameda owned a large portion of FTX itself. This made the assets illiquid (and very much against the rules in any normal financial services operation).
Alameda was borrowing millions of dollars from FTX, using it’s FTT reserves (FTX’s own cryptocurrency) as collateral. The problem was this was pointless due to the relationship between Alameda and FTX. Soon it was rumoured that FTX has begun using user funds to loan out to Alameda.
On hearing the rumours, Changpeng Zhao (or CZ as he’s known), the CEO of FTX’s main competitor Binance, said they would be winding down their position in FTT over a few months. This lead to a “run on the bank” as consumers tried to get their money out before the price completely crashed. But due to the structure set up by FTX and Alameda, they couldn’t. Binance soon issued a letter of intent to purchase FTX. After 24 hours (and some no doubt illuminating due diligence) Binance ran for the hills, stating that the issues they had found were “beyond Binance’s help or ability to control”.

The Reverie
Needless to say, if you had money stored in FTX’s secure wallet when it went down, it was game over. There was nothing to back it up. There was no insurance. It was gone.
If what happened to FTX sounds like a pyramid scheme, it’s because it probably is. It is under the microscope of authorities across the world. Lots of people lost a lot of money. The mastermind behind FTX and Alameda Research, Sam Bankman-Fried, lost $15 billion off his net worth overnight. Bitcoin dropped to its lowest price in 2 years. The leaders of other exchanges are queuing up to beg and promise an already battered and bruised base that they’ve never had their hands in the cookie jar.
The first problem is that the system is set up to make it easy for this kind of thing to happen. These companies don’t have to report their sales in the same way you do with normal currency. This makes it easy to dump coins onto unsuspecting retail investors. Because of the scale of the opportunity, there is more incentive for these organisation to take massive risks – because ultimately the real risk is passed off to the retail investor as the bottom of the pile.
The second problem is that users are committing vast amounts of money into a trust-less ecosystem. It’s not regulated or insured. It’s main players are spread out throughout the world, across multiple jurisdictions. That said, it is very likely that regulators (in the US at least) will be paying very close attention to FTX to see if they mismanaged funds. And the chances are that they have. It’s a scandal akin to the mortgage backed securities problem that caused the 2008 global financial crash. The difference here is twofold. Firstly the crypto market is not big enough (anymore) to cause worldwide problems. Secondly, unlike the big banks and hulking financial institutions, which were directly responsible for the 2008 global crash, some of these people might actually go to jail.

Most of this summary and analysis is paraphrased from Pivot, a podcast from Vox Media. The podcast is an essential and balanced voice in the world of tech and politics. It’s presenters, Scott Galloway and Kara Swisher, offer insight and wisdom on a range of topics. And, to make things even better, they do so with charm, compassion and good humour. You can listen to the podcast here: https://podcasts.voxmedia.com/show/pivot
For more Smarticles on the savage and brutal world of crypto tricks, read about the Squid Game Token here: https://smarticlesdotcom.wordpress.com/2022/01/15/part-2-crypto-tricks/














