It is a financial fiasco which has not yet revealed all its victims and, equally importantly, all its secrets.
The overnight implosion of the FTX cryptocurrency exchange was a shock, unpredictable even among the Cassandras of the crypto industry. In February, the firm was valued at $32 billion. In the summer, FTX was the savior for cash-strapped cryptocurrency firms, victims of the collapse of sister cryptocurrencies Luna and UST, or TerraUSD.
Analysts have already drawn comparisons to previous financial debacles. Sam Bankman-Fried, the founder of FTX, has been dubbed the “Bernie Madoff of crypto”, after the legendary con man who perfected the Ponzi scheme.
But the jury is still out on whether FTX is closer to the energy broker Enron or the investment bank Lehman Brothers.
‘Crypto’s Lehman Brothers Moment’
Analyzing the role and position of FTX, and most importantly its founder and former CEO, it appears that the firm is more of a Lehman Brothers than an Enron, in the cryptocurrency sector.
The downfall of Bankman-Fried’s empire threatens the entire crypto industry. As with Lehman Brothers, whose collapse threatened to bring down the global financial system, the failure of FTX and its sister companies risks destabilizing the crypto universe.
“FTX is crypto’s Lehman Brothers moment,” said Nick Saponaro, CEO of crypto firm Divi Project. “In fact it’s worse. In ’08, investors would have had some protection. FTX’s investors will not and if history teaches us anything, they will lose everything. Inevitably, global regulators will see this as their cue to step in and crack down hard on the industry, making it very difficult for DeFi providers to operate without the oversight of a third party. The polar opposite of why crypto was created.”
DeFi is decentralized finance, which aims to disrupt the traditional financial services sector.
Bankman-Fried’s empire looks like an octopus with tentacles which extend across all aspects of the industry. It is important to note that the Bankman-Fried companies were undoubtedly targeting both retail and institutional investors.
At the top of the Bankman-Fried holdings there are four companies. The first, FTX, is a platform where you can buy and sell cryptocurrencies. This platform targets investors outside the United States. There is also FTX US, a platform similar to FTX for U.S. investors.
From Coins to NFTs
Then, there is Alameda Research, which performs all the typical hedge fund operations and is also a cryptocurrency trading platform for large investors.
The final arm is FTX Ventures, which is Bankman-Fried’s personal venture capital firm.
These four companies were very active in the crypto space. Between them, they had investments in more than 250 companies and projects in the sector. Their investments were in all segments of the cryptocurrency industry: coins, non-fungible tokens (NFTs), trading, loans, gaming etc.
They became very active last summer when many crypto businesses were facing a credit crunch due to their exposure to sister cryptocurrencies Luna and UST, or TerraUSD, which crashed on May 9, wiping out at least $55 billion.
Alameda, FTX, FTX US and FTX Ventures then emerged as saviors, bailing out many companies. FTX Ventures, for example, on Sept. 8 acquired 30% of Skybridge Capital, the alternative investment company founded by Anthony Scaramucci, the former short-lived director of communications at the White House, under president Donald Trump.
Alameda had investments in at least 36 major companies in the crypto industry, including decentralized finance (DeFi) projects like Solana, which offers smart contracts, a pillar of the finance of the future.
FTX, for its part, acquired the assets of bankrupt crypto lender Voyager Digital in September, while FTX US bailed out lender BlockFi and has an option to acquire the company.
Bored Apes + CryptoPunks
FTX Ventures is an investor in Yuga Labs, the company behind the Bored Apes Yacht Club (BAYC) which represents the famous collection of non-fungible tokens (NFTs) Bored Apes. Yuga Labs is also the owner of the CryptoPunks NFT collection. Bored Apes and CryptoPunks are the two most expensive NFT collections in the world.
“Yuga has never used FTX / doesn’t have anything there / never has. No money stuck anywhere or anything like that. FTX was a small investor as part of our seed round, but obviously we got that check a long time ago. Doesn’t affect our operations,” Yuga Labs cofounder Greg Solano wrote in a Discord chat message that leaked on Twitter.
BlockFi has already suspended cash withdrawals from its customers and is considering filing for bankruptcy. SOL, the cryptocurrency issued by the Solana ecosystem has collapsed by 65% in 14 days.
Genesis Trading has stopped customers from making withdrawals and issuing new loans following FTX’s downfall.
The Genesis setback impacts the Gemini cryptocurrency exchange, with which it has a partnership.
FTX also has prestigious investors who will suffer losses. BlackRock, Binance, LightSpeed Venture Partners, Ontario Teachers Pension Plan, Ribt Capital, Sea Capital, Sequoia Capital, Temasek, Tiger Global and Softbank.
Sequoia Capital stated on Nov. 9 that it valued the $210 million investment into FTX as $0 and considered it a total loss.