The aftershocks of the once-popular crypto exchange FTX’s recent and rapid demise last week continue to reverberate throughout the crypto and VC industries, rattling investor confidence and perceptions of stability across the sector.
The stunning implosion came about after it was revealed FTX used customer funds to bail out its sister trading firm, Alameda Research, to the tune of around $10 billion after Alameda itself suffered heavy losses due to trading strategies dating back to April 2021. Exchanges must back their customer funds 1:1 to ensure and insure liquidity.
Perhaps smelling blood in the water, Changpeng Zhao (CZ), the founder and CEO of the world’s largest cryptocurrency exchange Binance, on Nov. 6 began to unload his nearly $2 billion equity stake in FTX held primarily via FTX’s token called FTT. This triggered fears that FTX was unable to pay its debts and that CZ knew something other investors didn’t.
The FTT digital token makes up nearly 60% of FTX’s assets. Sam Bankman-Fried (SBF), the since-resigned CEO and founder of both FTX and Alameda Research, used FTT to shore up the balance sheet of Alameda. CZ’s actions caused a “run” on FTX, as the exchange’s customers started to withdraw $6 billion of their own money, crashing the price of FTT tokens by 72%. Binance quickly offered to acquire FTX, which at its peak was valued at $32 billion, as part of a rescue deal. The merger would solidify Binance’s position as the globe’s top…
