As if the three major bankruptcies earlier this year weren’t enough, the crypto markets recently had to deal with yet another meltdown. Sam Bankman-Fried’s now insolvent FTX sent shockwaves with its sudden demise. At its peak in July 2021, the platform had over one million users and was the third-largest exchange by volume. As for Fried himself, his net worth tanked 94% from his peak of $26 billion to what the Bloomberg Billionaires Index described as “no material wealth” on November 11, 2022. So, how did all this happen and what are the next steps? Read on to find out.
What is FTX?
Founded in 2019 by Sam Bankman-Fried (sometimes referred to as SBF) and Gary Wang, FTX is a cryptocurrency exchange that lets users buy, sell, and hold cryptocurrency. Crypto exchanges such as Crypto.com, Gemini, and BitMart act similarly to stock brokers in that they facilitate transactions between buyers and sellers of fiat money, crypto, or other assets. Additionally, FTX also allowed consumers to make crypto deposits and take out crypto loans, acting as a bank of sorts.
As FTX’s popularity skyrocketed, the company’s marketing department also began making some big moves; renaming the Miami Heat stadium to the FTX Arena (the Heat are currently seeking a new naming rights partner in light of FTX’s bankruptcy), sponsoring the esports team Team SoloMid, and even Super Bowl ad time with a masterpiece of a commercial starring Larry David.
This massive triumph for FTX was even more impressive in light of the crypto winter in the first six months of 2022, wherein an assemblage of crypto firms – Terraform Labs, Three Arrows Capital, Celsius, and others – went belly-up seemingly one after the other. Things were looking up, way up, for Fried.
When things unfolded
To understand the beginning of the end, you should know that SBF also founded Alameda Research, a cryptocurrency trading firm. Being a quantitative trading firm, Alameda used techniques such as arbitrage, market making, yield farming, and trading volatility to make money. SBF owned a 90% stake in the company. People didn’t exactly know it, but Alameda suffered big losses in the summer of 2022 and needed some extra cash to stay afloat.
Starting in September of 2022, news outlets began reporting concerns on the allegedly close relationship between FTX and Alameda. Bloomberg stated that stock market regulation, if applied to crypto, would have prohibited this link; Alameda was the biggest depositor of stable coins on FTX (cryptocurrencies whose value is pegged to that of another currency).
Why might this be problematic? In short, some major conflicts of interests would arise, which actually ended up occurring in the case of FTX, who lent $10 billion of its customers' money to Alameda Research – almost all of which went to zero. As reports of this relationship surfaced, people naturally began raising an eyebrow. In early November 2022, CoinDesk (basically the CNBC of crypto) published an article claiming that Alameda Research held $5 billion of FTT (the exchange token issued by FTX, which allowed owners to enjoy a slew of benefits on the FTX platform such as lower trading fees).
The main issue was now the fact that Alameda didn’t have much other than FTT – a completely made-up currency with artificially attributed value – to stand on.
When things completely blow up in your face
Binance is the world’s largest cryptocurrency exchange in terms of daily trading volume. Its founder, Changpeng Zhao (CZ), and SBF have some well-documented beef on Twitter and so it may come as a surprise that Binance once held $580 million in FTT tokens. But following the publication of the CoinDesk article, CZ unloaded everything, triggering a 3-day, $6 billion sell off on FTX.
The turn of events are actually quite simple: people saw that Binance lost confidence in FTX and followed suit. On November 8th, Binance announced a rescue mission of sorts to purchase FTX, but not FTX.US (FTX has two exchanges; ftx.com for users from all over the world except US citizens and a US-regulated ftx.us domain for American traders). As that was going on, Zhao said he expected FTT to be "highly volatile in the coming days as things develop,” which had exactly the kind of effect anyone would expect:
Due to concerns regarding the mishandling of customer funds and potential legal investigations of FTX (and, let’s be real here, the fact that SBF and FTX are the literal rivals of CZ probably played a role), Binance backed out of its acquisition deal on November 9th. The following day, Bahama financial regulators froze the assets of FTX Digital Markets (FTX’s subsidiary in the Bahamas) and began drawing up plans for liquidation. It was at this point when Bankman-Fried admitted on Twitter that FTX didn’t have enough funds to meet customer demands.
On November 11, SBF stepped down as CEO and FTX, alongside more than 100 affiliated companies, filed for Chapter 11 bankruptcy protection, the kind that involves reorganizing the business’s affairs, debts, and assets. A week later, the Securities Commissions of the Bahamas (FTX was incorporated in the Bahamas) seized control of FTX assets, marking what was probably the least of Bankman-Fried’s legal worries, as we’ll soon see.
Looking at the balance sheets
Let’s quickly recap: FTX lent a bunch of depositor money to Alameda Research, which was a risky move in and of itself since there’s no guarantee that Alameda Research will be able to pay back the money given its poor investment reputation. Once this relationship was exposed, Binance CEO Changpeng Zhao triggered a massive sell-off that drove FTX, Alameda Research, and more than 100 other affiliated companies into bankruptcy.
Now, here’s an idea of what FTX’s financial state was like. They had $900 million in liquid, or easily sellable, assets, most of which was in Robinhood stock and the the Stably USD and USDB stablecoins. Their less-liquid assets were composed of nearly $3.8 billion of coins related to Solana; a blockchain infrastructure backed by FTX. That and $554 million in their own FTT currency. To top it all off, FTX had $1.5 billion in private equity, $43 million in Twitter shares, and $74 million in TRUMPLOSE tokens (created by FTX to enable a betting market on whether Trump would lose the 2020 elections), all of which were illiquid assets.
But when facing something that can best be described as a bank run, what really matters here are the liquid assets, the ones that you can immediately convert to cash. So that’s $900 million…up against almost $9 BILLION in liabilities.
One of the most important aspects of banking law is depositor insurance – banks that take deposits and reinvest that money through loans need to ensure that, at any given time, they have a sizable amount of liquid funds on hand that can be given to their customers. This is the exact purpose of reserve requirements.
Banks in the crypto space, however, tend not to feel the need for this risk management policy and end up going all in with deposits, as was the case with FTX. Even just from a purely fiscal perspective, getting your liquid assets-liabilities ratio under control is a must.
The aftermath
Being one of the most influential and far-reaching players in the crypto markets, it goes without saying that FTX’s collapse was felt everywhere. Forget Bitcoin and Ethereum prices tanking, cryptocurrency lender BlockFi filed for bankruptcy in late November. Genesis, another lender, halted depositor withdrawals. Cronos Crypto.com’s exchange token lost $1 billion in value in November.
But what’s happening with FTX itself? SBF was replaced as CEO with John J. Ray III, an insolvency legend who oversaw the liquidation of Enron (another story for another article, just know that it’s a big deal). He stated that in his over 40 years of experience, he had never encountered "such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
This is an understandable sentiment when considering the mess Ray is gonna have to deal with. FTX owes $3.1 billion to its top 50 creditors alone, with there being as many as a million total creditors. It’s safe to say that a large majority of these debt holders won’t be seeing their money anytime soon (if at all), especially seeing as how FTX had only $1.24 billion in cash balances as of November 2022.
And we’ve hardly mentioned the legal complications for Sam Bankman-Fried. A few things are happening in that department; FTX currently has the U.S. Justice Department, Securities and Exchange Commission, and the Commodity Futures Trading Commission on their case as to whether any crimes were committed. Bahamas investigators are also conducting a separate investigation. The United States House Financial Services Committee has also formally requested for SBF to testify before Congress on December 13th.
Perhaps the most well-known measure is the class-action lawsuit filed in November 15, 2022 against not just SBF but also a list of celebrities who endorsed FTX. This includes but is not limited to Stephen Curry, Sahquille O’Neal, and Naomi Osaka. The plaintiffs, being a group of FTX users, allege that those mentioned above took “advantage of unsophisticated investors from across the country” and owes American investors over US$11 billion in damages.
We can’t say what’s going to happen to SBF or even whether any charges will be pressed, but the court of public opinion has, for the most part, already ruled him guilty. Ultimately, the real losers aren’t SBF, his workers, or even the other company’s that were affected by this – it’s the hundreds of thousands of depositors who woke up one day, only to see their FTX savings vanish in thin air.
Econ IRL
It’s generally not very common to have superb retirement benefits and superb wages at the same time. Rather, firms will offer more of one (and thus, less of the other) depending on how workers value these 2 forms of compensation. Therein lies the central question of this week’s paper: how do workers value retirement benefits relative to wages and what are the impacts of these firm benefits on hiring?
The author uses 3 main strategies to answer this question. The first is to combine online job posting and resume data with firm retirement & health plans. Using a dataset that provides these metrics, the author finds that an average 1% increase in retirement benefits results in the likelihood of filling a position by 2.7%. The second strategy is through presenting a hypothetical job offer that, when answered by people in surveys, would give insight into people’s willingness to pay for different retirement plans. In this regard, the author finds that workers are willing to trade, on average, 1.4% in wages for every 1% increase in employer match (that is, the funds that employers add to your retirement plan).
The third strategy is to build a model for workers seeking employment and their valuations of retirement benefits. With a dataset of hundreds of worker switches between firms within the same industry-occupation, the author finds a substantial willingness to pay for retirement, particularly for those in higher-income occupations and those in older average age occupations.
‘Till next time,
SoBasically