The crash of FTX and its aftermath is undoubtedly the worst crisis in crypto’s history — one that will likely take years to recover from. Personally, my emotions have gone from shock, to disbelief, to sadness, to anger, to fierce determination to move forward.
There’s a lot to unpack here, and it’s on the longer side, but I did my best to explain the most relevant facts in plain English. Specifically, we’ll cover:
What happened on the surface
What happened behind the scenes and the specifics of FTX’s balance sheet (or lack thereof)
The aftermath of the collapse
What it means for the industry and where we go from here
As Samuel L. Jackson once said in Jurassic Park, “hang on to your butts.”
Act I: The Bigger They Are…
Context matters, so let’s start from the beginning. This also might be helpful if you have no idea what any of this is or what’s going on (though as a Triple Entry reader, that seems unlikely).
Let’s get into it.
What’s an SBF?
Founder of FTX Samuel Bankman-Fried, commonly known by his initials “SBF,” was born March 6th, 1992, on the campus of Stanford University into a family of academics (his father Joseph and Barbara are both respected professors of law at Stanford). He graduated from MIT in 2014 and began his career at Jane Street Capital, a proprietary trading firm.
SBF made his way from Jane Street to a charity called the Center for Effective Altruism. What is effective altruism, you ask? Whether you call it a movement, a research field, a community, or a philosophy – all of which apply – it is supposedly a core tenet of SBF’s philanthropic activity. That’s an intriguing tributary in this whole discussion, but we’ve got other stuff to get through.
The Alameda-to-FTX Pipeline
Our boy is fresh out of Jane Street Capital in 2017 and wants to hang his own shingle. He founds Alameda Research, an algorithmic trading firm that would go on to report assets of $14.6 billion as of June 30th of this year. We’ll get into a bit more about Alameda’s balance sheet and some of the specifics in a minute.
In 2019, SBF founded FTX, which would become one of the world’s fastest-growing cryptocurrency exchanges. How fast? Well, by September of 2022, just three years and a few months after its founding, FTX was valued at $32b, poised as it seemed (at the time) to ascend to the levels of institutional finance giants like JP Morgan-Chase or Citibank. And its profile wasn’t confined to finance or crypto – FTX was everywhere. You might have seen this unintentionally prescient commercial from this year’s Superbowl LVI.
FTX didn’t just fork over some ad spend for one of the coveted Super Bowl ad slots either. Sponsorships, endorsements, and bragging rights deals abounded between FTX and the sports world, some of which we’re going to summarize below as our “WTF Stats.”
FTX Sponsorship W.T.F. Stats
(With [whom], To [do what], For [how much]*)
*where disclosed or available
WTF: Miami-Dade County/Miami Heat; rename American Airlines arena to FTX Arena; $135m
WTF: MLB; be named as official cryptocurrency exchange of the league (and have their logo stuck on the umpires’ uniforms – the first umpire uniform patch partner); undisclosed amount
WTF: UC Berkeley; stadium sponsorship for California Memorial Stadium; $17.5m
WTF: Mercedes – AMG Petronas F1 Team “Silver Arrows”; bragging rights as first ever Cryptocurrency Exchange Partner of the team
WTF: Sports stars Tom Brady, Steph Curry, Shaq, Shohei Ohtani, Naomi Osaka, and more; brand ambassador deals in exchange for equity stake
TLDR: SBF is a really smart dude that founded not one, but two behemoth companies: Alameda Research and FTX. Alameda Research is his trading firm that reported assets of $14.6 billion as of June 30. FTX is his exchange that once had a $32 billion valuation, sponsorship deals, celebrity endorsers, and a ton of institutional investment.
Act II: The Case of the Smelly BS (Balance Sheet)
FTX & Alameda: The Sisterhood of the Traveling Pants on Fire (Liar, Liar)
Remember how, just earlier this year, Celsius, Luna, and Three Arrows Capital (3AC) blew up? Rumor has it that Alameda also blew up in that time frame, so FTX and Alameda concocted a sinister bail-out plan.
Long story short, FTX lent billions of dollars of customer funds to Alameda and justified it by saying that FTX had claim on Alameda’s FTT tokens. FTT is (was?) FTX’s native exchange token that offered its holders discounted trading fees and tighter spreads; essentially, they’re transferable customer loyalty points. Before this whole debacle, about 197 million FTT tokens worth $5.1 billion were in circulation.
Also worth noting: FTX occasionally buys back its own FTT tokens, not unlike how publicly traded companies occasionally buy back their own stocks. And also like stocks, there’s a positive correlation between FTX profits and FTT price, so buying it is also a wager on the company’s continued success. But despite these similarities, FTT is not, in fact, stock in FTX.
FTX and Alameda continued business as usual, and SBF even paraded around D.C. shilling his DCCPA crypto bill to regulators, a stance that put him on the wrong side of just about every issue in the industry. We covered this at length in our last Triple Entry issue.
Earlier this month, Coindesk caught wind of this smelly situation, and—probably without realizing the can of worms they were about to open— published an article highlighting the fact that:
a) Alameda’s single biggest asset was 3.66 billion of ‘unlocked FTT” and
b) its third-largest entry was a $2.16 billion stash of “FTT collateral.”
This was all according to a “private financial document reviewed by CoinDesk.”
CZ Calls SBF’s Bluff
Enter: Changpeng Zhao (aka CZ), founder and CEO of the largest cryptocurrency exchange Binance, and another key player in this situation. Binance was an early investor in FTX, so it’s fair to say they’re “frenemies.” As FTX grew, the two became more competitive, so Binance sold its share in FTX—of which $2B was in FTT.
Last Sunday, on November 6th, CZ casually takes to Twitter to tell his 7 million followers that he’s dumping his entire FTT stash.
The price of FTT plummets 15-20% overnight. Suddenly things aren’t looking great for FTX and Alameda. Alameda CEO Caroline Ellison replies to CZ’s tweet offering to buy his shares for $22.
By this point, all eyes are on FTX, and everyone is holding their breath. SBF himself breaks the silence a day later on November 7th by tweeting “FTX is fine. Assets are fine…FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).”
Then, everyone in crypto everywhere breathed a sigh of relief, and we all lived happily ever after.
WRONG. SBF would end up deleting this tweet only a day later, likely because it was a flat-out LIE.
Everyone has questions: “Why would FTX go straight to the nuclear option of selling out to their competitor?” We’re all shaken up by the idea that the third-largest exchange by volume could be insolvent. The deal between FTX and Binance is a non-binding LOI, but everyone assumes the transaction will go through, which is a bit of a relief because FTX failing would be catastrophic for the industry.
Well, CZ gets ahold of FTX’s books, opens the first page, and is so horrified by what he sees that he takes a hard pass on the FTX deal.
Interlude: A Disgrace to Accountants Everywhere
Just how bad was FTX’s balance sheet? On Saturday, the Financial Times reported that FTX held just $900m in sellable assets against $9bn of liabilities the day before it collapsed into bankruptcy. As any good accountant would, I went and tracked down FTX’s balance sheet (actually, FT Alphaville did, so I just tracked down what they tracked down).
Allow me to take a brief, but meaningful, detour to explore.
WARNING. The “balance sheet” you’re about to see contains figures that a halfway decent accountant may find highly offensive. Proceed at your own risk.
I’ve seen some pretty ugly balance sheets in my days, but this one takes the cake—the whole $8bn dollar cake. It is a disgrace to all accountants everywhere, and it only gets worse the more you dig in.
In Cell 1A, we’re greeted with a disclaimer that’d be enough to launch an auditor into orbit:
“Note: all of these are rough values, and could be slightly off; there is also obviously a chance of typos etc. They also change a bit over time as trades happen.”
“Oh, ok, thanks for letting us know, Mr. SBF.”
The assets section of the balance sheet is segmented into three classifications: “liquid,” “less liquid,” and “illiquid” — right in line with accounting standards. The largest portion of these assets is in $470 million of Robinhood stock owned by a vehicle that was coincidentally excluded from Friday’s bankruptcy filing. Other than SBF’s Robinhood stock, “Liquid” assets include relatively smaller balances of stablecoins and fiat currencies.
Not so bad, right? We’re just getting started.
The first line under the “Less liquid” column is FTT — the thing that started this whole mess. Keep in mind that this balance sheet was created last Thursday (7/10) so when you see the column header “before this week,” it’s really referring to “before last week” (when everything started crashing). Note the $5.3 billion loss in a single week. That gives us a feel for just how bad the bank run on FTT was.
No one seems to be talking about the next line item except Matt Levine, who wrote an excellent analysis on it. The company’s largest holding as of Thursday was $2.2 billion worth of Serum which was valued at $5.4 billion just the week before.
According to CoinGecko, Serum is a “decentralized exchange (DEX) providing high speed and low transaction costs for decentralized finance (DeFi).” This information alone wouldn’t raise any eyebrows until you realize that Serum was created by none other than FTX and Alameda Research in partnership with the Solana Foundation.
According to the Serum project docs, “Serum (SRM) is the utility and governance token of Serum. If you hold SRM in your wallet, you receive a discount on fees.” The docs also mention a “buy and burn” mechanism. Sound like any other token you’ve heard of? It isn’t a perfect comparison, but you can think of Serum as the so-called “decentralized exchange” subsidiary of FTX, and the Serum token as the FTT of said subsidiary.
Why does this matter? Well, it turns out, FTX didn’t rely on just one, but two totally made-up Monopoly money assets to lend out customer funds. If you add just the balances of these two tokens before last week, about $11.3 billion, just over two-thirds of the $16 billion FTX owed to customers, was backed by its own tokens it invented out of thin air.
But wait, it gets worse.
There’s a line titled “Hidden, poorly internally labeled “fiat@” account”:
Poof — $8 billion vanished by way of the shadiest (and, yes, most “poorly internally labeled”) cash account I’ve ever seen. I won’t draw this out any longer, but will leave you with this rough summary of FTX’s “balance sheet”:
Even after all this, there’s still one BIG question: where did all the money go? There’s still so much we don’t know, but based on the reports coming from former employees, FTX Ventures was a huge money sink. Various shell companies existed that no one at FTX or Alameda knew about and they invested in various illiquid assets. FTX was buying up luxury apartments in the Bahamas and was in the middle of building a newer, more costlier office. Ultimately, SBF had two choices: let Alameda get liquidated or send user deposits to Alameda to keep it afloat. He chose the latter.
Act III: Chaos Ensues
Bankman Goes Bankrupt
Back to our main timeline of events. On November 9th, news breaks that Binance is likely backing out of the FTX deal after taking one look at its sorry excuse for a balance sheet. Later that same day, Binance announces it’s ditching the deal because FTX’s issues “are beyond [their] control or ability to help.”
SBF frantically starts calling everyone he knows in an attempt to keep his sinking ship afloat; needless to say, he’s unsuccessful in raising funds. Finally, on November 11th, FTX files for bankruptcy protection in the U.S and brings in John Ray III, the guy who oversaw Enron’s bankruptcy, to wind things down.
Just when you thought things couldn’t get any worse, FTX gets hacked and $600M gets drained. There’s a ton of speculation around the hack, but I tend to side with Dr. Patel on this one:
Takeaways for the Industry
Regulators failed us…again.
You could make the case that none of this would’ve happened had FTX been a US-regulated entity. Brian Armstrong, CEO of Coinbase, astutely pointed out that the US’s lack of clear regulation, or “regulation-by-enforcement” approach, pushed 95% of crypto trading volume overseas. More importantly, Gary Gensler had one job and he blew it. David Hoffman summed it up well in this tweet.
The accountants failed…again.
By “again,” I’m referring to Enron, Arthur Andersen, and the ensuing Sarbanes Oxley Act. I doubt that it’ll go down in the books as such, but make no mistake: this was largely an accounting failure. Why else do you think SBF hastily deleted this tweet mentioning “GAAP audits?”
And yeah, maybe we couldn’t have prevented FTX’s collapse, but we didn’t even try to detect it. When will we hold ourselves and our colleagues to a higher standard? For example, who audited FTX’s financials, and why did they not catch any of this? Were any other service providers complicit in the fraud?
We must DEMAND proofs-of-reserve.
If there is one small silver lining, it’s that the industry has suddenly renewed its interest in proofs of reserve in a big way. Proof-of-reserves (PoR) are independent audits by third parties to provide evidence that a custodian holds the assets it says it does. In the wake of the FTX crash, nine centralized exchanges — Binance, Gate.io, KuCoin, Poloniex, Bitget, Huobi, OKX, Deribit and Bybit — all separately issued statements that they would publicly publish their fund reserves.
I think that’s a good start, but accounting and finance professionals should be pushing the envelope on this alongside technologists (bonus points if you’re both). Personally, I believe the best type of proof doesn’t rely on any human being—not even an independent auditor. Most of the OG DeFi protocols achieve this standard of transparency, but I realize that centralized exchanges will likely always exist. Under that assumption, the next best thing is to leverage the proof mechanisms built into blockchains and to have an independent auditor verify inputs and outputs. Proof of reserves is just the start; we also need proof of liabilities, and, ultimately, fully audited financial statements.
Web3 needs more pragmatists.
Lastly, and as I pointed out on LinkedIn this last week, web3 needs more pragmatists. People that are willing to ask questions like, “why does FTX have its own exchange token” and “what actually happens with customer funds once they’re deposited.” That’s why I’m so passionate about onboarding accounting and finance professionals to the space.
Which leads me to…
Last week, even amid the distant sounds of sirens wailing and the searing heat of everything on fire, we launched the Multisig Job Board AND our crypto accounting jobs report, which gives a rundown of the ins and outs of finding and landing your next web3 accounting and finance opportunity.
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