What does the collapse of FTX mean for the future of crypto?


What does FTX’s collapse mean for the future of crypto?

Over the course of just a few days this week, FTX, the world’s fourth-largest cryptocurrency exchange, collapsed in a breathtakingly fast-moving spiral. Its CEO and leader, crypto billionaire and figurehead Sam Bankman-Fried, known in the industry as SBF, has now resigned, and FTX and dozens of its related entities have filed for bankruptcy.

This stunning collapse has raised questions about the future of FTX and of the broader crypto industry — and the potential for a chain reaction to affect broader financial markets. What happened, exactly? How did FTX go from being a star of the industry to a firm in crisis? And what does this mean for crypto?

Friday morning, Grid Tech Reporter Benjamin Powers hosted a Twitter Space with Nikhilesh De, CoinDesk’s managing editor for global policy and regulation, and Noelle Acheson, the author of the Crypto is Macro Now newsletter, to discuss the developments of the past few days. This transcript of their conversation has been edited for length and clarity.

Benjamin Powers: Thank you all for joining this Space today — we have a lot to talk about. Let’s start out with the news of the day. This Space is titled “Crypto crisis: What’s next for the troubled exchange FTX?” and as of this morning, what is next in fact is that Sam Bankman-Fried is resigning as CEO, and FTX is filing for bankruptcy. So we’re going to cover how we got to this spot. But first of all, I just want you to get your initial reactions to this breaking news as of 90 minutes ago and see what your thoughts are. Noelle, I want you to jump in first.


Noelle Acheson: Thanks so much, Ben. It really is hard planning on talking about anything to do with FTX — I think it’s moving so fast. But this was, I guess, the outcome most of us were expecting. I personally didn’t expect it to happen so fast, and it’s really impressive that they managed to get the new CEO of the stature of John J. Ray in place so quickly, and it’s interesting to see where it goes from here. I was just going through the documents I’ve been able to find online. We still are not aware of the extent of the web of entities involved; 134 entities have filed for bankruptcy today. And we have no idea yet about the liabilities that unite this web across liabilities and what this means for users and clients.

BP: Absolutely. There’s so much to unpack, as you said, the story moves so quickly. Nik, what are your immediate thoughts on this? I know you published a piece this morning reporting on this news.

Nikhilesh De: This has been such a weird … I mean, we still don’t know the full extent of the issues here. We have a single filing that has been shared so far that we’ve been be able to find, and it’s just kind of the initial condition for things like bankruptcy. And so you can check mark saying, “OK, we have assets within the value of $10 to 50 billion. We have liabilities within $10 to 50 billion.” But that obviously doesn’t present anywhere near a real picture of what their actual situation is. So it is really quite something. I’m also curious how many of the 134 companies that are filing for bankruptcy actually know that they’re filing for bankruptcy, because you have a lot of entities here. Did FTX Global reach out to, for example, all of their subsidiaries, all of the affiliated entities, and say, “Hey, by the way, we’re gonna do this tomorrow.”

Or not, because, you know, up until yesterday, Sam Bankman-Fried was on Twitter saying, “Hey, yeah, by the way, we’re in trouble. But, you know, FTX U.S. is fine.” So I feel like there’s gonna be lot of questions right now about the communications over the last couple days.

BP: Essentially, crypto, and I think FTX itself, is going through a bit of a “Bear Stearns” moment when it comes to the pretty stunning collapse of what was one of the most rapidly rising exchanges in the world. And SBF and FTX, I’d argue, was the face of U.S. crypto, working closely with the U.S. government around regulations and really was bringing some legitimacy to a space that has long been side-eyed by regulators. So this is really one of the seminal moments in the crypto industry — it was buttoned up in part today with this filing for bankruptcy. But I want to walk us back a little bit to how we got here, and CoinDesk [reporter] Ian Allison’s story that started this whole saga eight days ago, nine days ago. Walk us through how we got to this point and the trajectory of reporting around the exchange itself over the last nine days.


ND: So Ian got this balance sheet for Alameda Research and published that last week, saying, OK, it turned out that a lot of Alameda’s balance sheet is in fact the FTT token. And initially, it didn’t make a huge splash. People were looking at it saying, “Oh wow, this is weird.” But it took a day or two for people to really start questioning — oh, hang on a second, if there is a huge amount of FTT token on Alameda’s balance sheet, what does that mean for the rest of it?

BP: Let’s briefly clarify — Alameda is FTX’s sister company. They are closely linked in some ways and both headed by SBF. FTT is a coin issued by FTX. So just for people who are maybe not up on the story.

ND: So FTT is a token issued by FTX. It’s an exchange token. Basically, if you are a user of FTX, you can use that FTT to perhaps get discounts or something when you’re trading on FTX. So it turns out that Alameda, which was cofounded by Sam Bankman-Fried, was in possession of a large amount of FTT tokens, which were issued by one of the other companies cofounded by Sam Bankman-Fried.

So people started asking questions about that, wondering if that meant that they’re declaring that some of their balance sheet is functionally their own token. Does that mean they don’t have the actual like real-world assets that they claim to have or the actual crypto assets that they claim to have?

And then, people kind of wondering if that meant they were insolvent, but I think things really didn’t step up until CZ [Changpeng Zhao, known as CZ] of Binance — Binance being the world’s largest crypto exchange by volume, CZ is the founder of the exchange. And he came out over the weekend and said, “Alright, well, we’re concerned about FTX now, so we’re gonna dump the entirety of our FTT tokens.” I think it was something like $530 million of FTT tokens, and CZ was threatening to dump it.

At around the same time, the CEO of Alameda tweeted out that the balance sheet that was presented did not have the full picture, that there were some $10 billion in assets that were not reflected. And I only bring that up now because I want to come back to this in a minute. But CZ said he would dump the FTT tokens, which led to, according to Sam Bankman-Fried, people withdrawing around $5 billion worth of crypto from FTX over the weekend on Sunday alone, which basically was more than FTX could handle. They did not have the liquidity to support that amount of withdrawals.

So on Monday, we start having some issues, and then Tuesday in particular is when Sam Bankman-Fried came out and said, “Alright, well, we’ve agreed with Binance to conduct a transaction, which is going protect our customers.” And no one knew what that meant until CZ came out and said, “Yeah, we’re gonna acquire FTX.” They signed a nonbinding letter of intent. And so people were like, “OK, wow, so FTX is actually going under, but at least Binance is going to save it.” And then on Wednesday, Binance said, “OK, the issues are too big. We’re not going to be able to save it. We are pulling out of this deal.” And that’s basically when things went from bad to worse.

My desk [at CoinDesk], by the way, we were the first to report that Binance was walking away, but reporting by various news outlets, including the Wall Street Journal and Bloomberg, reveal that FTX probably had a hole between $6 and $10 billion. That’s a lot of money to be missing — there’s no other way to put it. And that all led to this morning, when FTX filed for bankruptcy, saying we don’t have the money for our customers. They went from being this really huge powerhouse in D.C. and the crypto world, and now they’re another company seeking Chapter 11 bankruptcy. So they’re hoping to come back here — this is a reorganization restructuring bankruptcy, not a liquidation bankruptcy. They’re going continue operating, but at least for now, it looks like most of the withdrawals are frozen, most of the trading stuff is up in the air. They’re in a not good situation.

Noelle Acheson: A couple of things to add to that. It’s worth stressing that the sequence of events that Nik has just described happened over a few days, most of them happening over two days, which is astonishingly fast. I don’t recall this kind of speed happening in traditional finance. We know things blow up, but this fast and this publicly, it was totally astonishing. But it’s also worth stressing a bit why Ian’s excellent article triggered this whole thing.

Ian did point out the holdings of FTT, the token issued by FTX, on Alameda’s balance sheet and the relationship between the two companies. And this triggered the worries for those of us who don’t fully understand how FTT works, triggered worries about Alameda’s health — not necessarily yet FTX’s — because one, FTT is very illiquid token. So certainly, we’re seeing that Alameda’s balance sheet is largely composed of assets related to a very illiquid token, but also a token whose value is related to the business of an affiliated company, FTX.


So that concentrates the risk even further, that raise concerns about Alameda’s health and concerns that Alameda might need to divest its FTT, which would push the value down. But this was before CZ even tweeted his part in the whole equation, and everyone assumed, quite likely it seems, that FTX also had a big chunk of FTT on its balance sheet and therefore could be hurt should the downward spiral happen, which it did. And what CZ did was trigger exactly the worst case for Alameda, that the readers of Ian’s article had started to worry about.

BP: Now these are excellent points, Noelle, thank you. And Matt Levine over at Bloomberg described this as “corporate murder,” in some way, with CZ selling off FTT and triggering this downward pressure that really started to spiral and resulted in what was ultimately a pretty old-fashioned bank run, in terms of the amount of withdrawals over a certain time such that obviously FTX could not cover them and had to freeze withdrawals. But Noelle, I know there’s been talk of this being a potential crypto contagion. Crypto had been relatively stable before this; obviously, it’s not seeing the highs that it did maybe one year ago as of yesterday, when Bitcoin hit its all-time highs, as you note in your excellent newsletter, but what are some of the companies that have lost investments here, and are really seeing this all go down the drain?

NA: More than we could probably even imagine at this stage, we’re starting to see some of the very tragic announcements trickle out, of companies that are affected by this. We haven’t yet seen total closures, but we could well end up doing so because this is a much more serious blow to the industry I’ll say than the Three Arrows Capital collapse back in June. That triggered a very significant contagion event, because everyone was selling crypto assets to raise collateral to meet margin calls, and if they couldn’t, they had to sell anyway. And this is a bigger one, because FTX is, as we’ve seen through the bankruptcy filing, it has its fingers in so many different pies, and so many more users could end up being affected by this. So it’s a bigger blow.

The contagion could end up being more significant just through the necessary asset sales. We’ve seen a bunch of them already largely from probably FTX and related companies frantically trying to raise capital to meet client withdrawals as well as their other obligations. But it’s the domino effect of other companies having to curtail operations and perhaps even close down because of lack of access or loss of funds from the FTX holdings.

BP: Yeah, absolutely. I’m recording an article out today, and that was reflected in the people I was talking to. They were saying, “Look, we think about this in terms of crypto, and it’s certainly true, but at the same time, you know, investors are losing money in one place, they might have to liquidate in other places that extend well beyond crypto to make up the difference. Obviously, [venture capital firm] Sequoia Capital was exposed to FTX, and a number of other players in the space both in crypto and beyond it do have some exposure. But, Nik from the regulatory perspective, I’ve been talking to former SEC officials and others, and they’re articulating that certainly this is going to get a lot of scrutiny. We see lawmakers coming out with various statements saying that we need more regulation in this industry. Do you think that this is a tipping point? Obviously regulating crypto has been a sore spot with lawmakers and those in the crypto industry for years at this point, but this really does feel like a step down a path that we may not come back from.


ND: Yeah, I think so. I think the big question here is, is there any existing regulatory framework that could have either caught that this was happening or prevented this from happening? FTX is a Bahamas-based company, but, you know, had close ties to the U.S. So U.S. investigators are already investigating, and I imagine it wouldn’t be too difficult for them to say, “We have jurisdiction, this company has U.S. operators, has U.S. investors, probably even has U.S. users.” So I don’t think it would be difficult for them to make the case that it’s in the SEC or CFTC jurisdictions. But the big question, again, is what specific regulatory framework could have caught that FTX was apparently sending its own money or its customers’ money around to its sibling entities.

The other question is how they will respond. So far we’ve heard, “OK, yeah, we’re monitoring this” from lawmakers. Some have said we need more legislation, but we haven’t heard anything specific. The closest thing we’ve heard is that the Digital Commodities Consumer Protection Act, which is a bill in the Senate Agriculture Committee, will move forward. But we also don’t know if that’s going to change or if that would have really had an impact on what’s happening. So there will be a response, but I struggle to see what concrete actions are happening now.

NA: That’s an excellent point, Nik. We don’t know what would have prevented this, but we also know and you know, you come at us. We also know that regulation reacts, and here it needs to react. But at the same time, it’s not a question of just reacting as we have seen in crypto, but even more often in traditional finance. It’s a question of how this new type of rails on which these asset moves can be harnessed to spot moves that might highlight some kind of problems and you know, because there’s been some excellent forensic works in tracking some of the movements from the various addresses associated with FTX and Alameda. And this is stuff we could have maybe seen sooner had anyone been looking, but we didn’t think to because Sam Bankman-Fried seemed like a good guy. He was the best-known face of crypto in Washington. He’s one of the most liberal proponents for greater regulation. So why wouldn’t we trust FTX?

ND: Yeah, adding on to that, he was a massive donor in the last political cycle, and the one before, that he donated like $5 million to the campaign of U.S. President Joe Biden. This year, he’s donated millions, his companies have donated millions. This company was a pretty major financial player in the last few elections. And obviously, they’ve been involved in lobbying. We saw White House visitor records from I think May saying that they had actually had meetings with White House advisers. They have a meeting with lawmakers, talking to regulators, so they were pretty heavily involved with the U.S. regulatory and political scene.

BP: I’ll pose this to both of you: What do you think this has to do in terms of potentially resetting how traditional finance looks at their exposure to crypto? Obviously, we saw a lot of institutional support over the last few years, as you know, Bitcoin and other assets rose in prominence and price, but this feels like a moment where traditional finance [”tradfi”] might take a step back and reevaluate its exposure.


NA: So I’ve actually been speaking to my friends in tradfi who have been getting into crypto — we’re talking about very big legacy names — and almost across the board, it’s, “We need to be cautious.” Cautious is a really good word, it’s a really vague word. But yeah, I wouldn’t be surprised to see a slowdown of some of the legacy bank intents or plans to get involved in this industry, as well as some of the investment plans from the large funds, in infrastructure building projects. It’s been a big blow in terms of sentiment. I’ve also had more tradfi people who aren’t even interested in crypto reach out to me about this. I was doing something with the BBC, in fact, yesterday, on a totally nonfinancial, non-crypto, non-tech platform, because this is the first time they’ve ever even spoken about crypto. This is reaching much farther than any of the other blowups that this industry has had. And because of that, it is going to trigger a lot of caution, to use that word again, in the approach that the banks feel they can take. Whether they want to or not is also not the only factor. It’s also what they feel their shareholders and stakeholders will be willing to accept.

ND: The other thing that strikes me is that, it does feel like a lot of crypto is driven by the perception, right? People looked to Sam Bankman-Fried because he looked like he was doing things right, he was operating a fairly successful company, he was transparent, he was willing to engage with people. And I am curious how it’s going to shake up now, because in terms of perception, earlier this week he said that FTX was fine.

And then it turns out they were not. He said FTX U.S. was fine a day before yesterday, right before filing for bankruptcy. So, you know, if the CEO of one of the biggest public companies is out there saying, “Oh, yeah, everything’s fine,” right before it absolutely was not, I imagine a lot of the banks or traditional firms that are looking into the sector are going to be a lot more skeptical about claims from other companies that are product issuers who are saying, “Yeah, this is safe. We’re taking, you know, XYZ precaution.”

Thanks to Lillian Barkley for copy editing this article.

  • Benjamin Powers
    Benjamin Powers

    Technology Reporter

    Benjamin Powers is a technology reporter for Grid where he explores the interconnection of technology and privacy within major stories.

  • Cameron Hood
    Cameron Hood

    Newsletter Editor

    Cameron Hood is the newsletter editor at Grid.