Crescendo nominated for Top Credit Union Consulting Service Provider 2023

Is FTX the new Enron?

Here’s the skinny on what happened to Enron

Enron was a Houston-based energy company that filed for bankruptcy in 2001. The company’s failure was due to financial fraud. Enron employees created fake companies and transactions to make the company appear more profitable than it was. This fraud led to the collapse of the company and cost investors billions of dollars.

Its failure led to one of the largest corporate bankruptcies in history. Tens of thousands of employees lost their jobs, and many people saw their savings wiped out. The scandal also led to major changes in financial regulation.

FTX is this generations’ Enron

FTX announced Friday that it was filing for Chapter 11 bankruptcy and that Sam Bankman-Fried was stepping down as CEO after revelations of a liquidity crisis at the company. Reuters reported last week that at least $1 billion of customer funds have vanished from FTX.

How did FTX fall?

Until its crash on Nov. 8, FTX was an exchange where you could buy and sell cryptocurrencies like bitcoin, was considered one of the most financially sound companies in the world.

In February, FTX was worth $32 billion while Bankman-Fried was one of the richest men in the world with a fortune valued at $15.6 billion.

Matt Levine at Bloomberg described FTX’s fall as a “corporate murder,” with Binance’s CEO Changpeng Zhao selling off FTT and triggering a downward pressure that started to spiral and resulted in what was ultimately a pretty old-fashioned bank run– customers making so many withdrawals over a certain time that FTX could not cover them and had to freeze the withdrawals.

Bankman-Fried also reportedly transferred $10 billion of customer funds from FTX to his cryptocurrency trading platform Alameda Research. FTX had also used its FTT token as collateral on loans. All of this contributed to FTX facing a shortfall of $1.7 billion

This led to zero liquidity, and Chapter 11 bankruptcy, which was filed on Nov. 11.

 

“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.”

– Nikhilesh De

 

This had massive consequences for FTX’s investors. Venture capitalist Sequoia Capital said it lost $210 million to FTX, and the Japanese firm SoftBank has calculated its losses at $100 million.

What does this mean for the Cryptocurrency and DeFi market?

Slower adoption of Crypto: Don’t be surprised to see surprised to see a slowdown of some of the legacy bank intents.  Now more than ever, whether banks want to get involved in Cryptocurrencies or not is also not the only factor –  will shareholders and stakeholders will be willing to accept getting involved?

Greater scrutiny: Perception plays a large part in the value placed on Crypto companies. FTX had a reputation of being one of the most stable, public Crypto businesses in the market. 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 claiming their business is stable. 

A call for Proof of Reserves: A solution that some are now calling for is that platforms and exchanges provide proof of reserves (PoR) — independent audits conducted by third parties seeking to ensure that custodians hold the assets they claim to on behalf of clients

At the end of the day, many in the industry view the fall of FTX as not just a financial issue, but a moral one. Transparency is the fundamental principle behind blockchain technology, and by extension the larger crypto community. 

If you’re a startup in the Crypto space, lean in to transparency. More than statements, provide solid evidence to your stakeholders and clients to maintain and build trust in your brand. 

There’s going to be a large hill to climb for all Crypto based companies, whether you’re DeFi, Blockchain, or trading platforms. 

Not getting the results you want?
Get a free consultation.

Jack Treseler

Jack Treseler

Jack is a serial entrepreneur with a decade of experience in marketing finance brands. Jack believes investing and business can be used for good, and loves helping fintech companies scale their business (and their revenue). He's also a fan of pineapple on pizza, but we won't hold that against him.