Sam Bankman-Fried’s ‘emperor’ aura makes downfall a crypto stunner


The question now is if the great SBF can be done in this quickly – in no more than a handful of days – what does that say for anyone else in the once-hot industry, now enduring a prolonged rout that’s wiped out US$2 trillion (RM9.43 trillion) of market value? — Bloomberg

Sam Bankman-Fried was supposed to be different than the run-of-the-mill crypto types. He was this wunderkind with a preternatural gift for math who had quickly built a crypto empire and then shrewdly expanded it during the worst of the industry’s meltdown this summer.

So the sudden collapse of his crown jewel – the crypto exchange FTX.com, which now needs a bailout from its chief rival, Binance Holdings – has left crypto investors in stunned disbelief.

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If people learned anything from the industry’s spectacular meltdowns in the spring – including the TerraUSD stablecoin, hedge fund Three Arrows Capital and lender Celsius Network – it’s that the ties that bind this nascent ecosystem are as pervasive as they are delicate.

Yet while FTX was part of that, it seemed more than just an exchange: It was something of a one-stop shop for crypto boosterism, with its financial backing, market-making heft, Washington lobbying muscle and penchant for offering bailouts of its own that reached most corners of the industry. The question now is if the great SBF can be done in this quickly – in no more than a handful of days – what does that say for anyone else in the once-hot industry, now enduring a prolonged rout that’s wiped out US$2 trillion (RM9.43 trillion) of market value?

ALSO READ: Binance plans to buy FTX’s non-US operations in latest crypto bailout

“I think if this bear market has proven anything, it’s that the emperor has no clothes,” Marc Weinstein, partner at crypto venture firm Mechanism Capital Ventures, said. “Even seasoned institutional investors can get swept away investing in hot deals at unreasonable valuations in a bull market.”

Anxiety about FTX and the indeterminate fate of its sister company, Alameda Research, washed over the already-battered space Tuesday. And the jitters translated into losses of more than 10% for Bitcoin and even bigger declines elsewhere in the crypto market. The extent of declines may depend on just how much contagion, if any, FTX’s sudden collapse will have in the market.

On edge

FTX and Bankman-Fried’s influence is arguably even bigger than that of Three Arrows Capital, whose collapse set off a wave of pain across the industry just months ago. So the lack of details surrounding the potential takeover of FTX by Binance Holdings, and the swiftness with which it was put together, put the crypto world on edge. Some of FTX’s investors found out about the deal on Twitter, according to people familiar with the matter. These investors are uncertain whether they will receive any money if the agreement with Binance goes through.

The list of losers in the collapse includes investors in Bankman-Fried’s exchange, valued at nearly US$32bil (RM150.88bil) in a January financing. Those include blue-chip names like the SoftBank Group Corp’s Vision Fund, the Ontario Teachers’ Pension Plan, the Singapore wealth fund Temasek Holdings Pte, hedge fund Tiger Global Management and Lightspeed Venture Partners. Following the January fund-raising, Bankman-Fried told Bloomberg the funds would likely go toward mergers and acquisitions, with possible targets including payments businesses, NFT-centric firms and the metaverse.

Other companies connected to Bankman-Fried also have strong ties with other major industry players, and FTX’s struggles have cast a pall of uncertainty over all of them.

FTX.US, the exchange’s American affiliate, which is not included in the preliminary Binance deal, provided crypto lender BlockFi Inc with a US$400mil (RM1.88bil) revolving credit facility that came with the option to purchase the company outright. Alameda Research, a crypto trading firm that was also co-founded by Bankman-Fried, offered a US$485mil (RM2.28bil) loan to Voyager Digital that failed to save the crypto brokerage from bankruptcy. FTX.US later won an auction for Voyager Digital’s assets.

Pain points

Industry investors have zeroed in on Alameda being a potential pain point for Bankman-Fried moving forward. The company is an active borrower in the crypto industry and reports that the firm held a lot of its assets in FTX’s FTT token, which has declined sharply in price, likely helped trigger the deal with Binance. While Bankman-Fried has said that FTX and Alameda are separate companies, the close relationship between the two has come under fire.

“The most obvious question is what happens to Alameda and the debt that they owe,” said Matt Walsh, founding partner at crypto venture capital firm Castle Island Ventures.

Bankman-Fried stepped away from Alameda last year, but he is estimated to own to nearly all of the firm and more than 50% of FTX. Walsh said that this kind of structure wouldn’t have flown in a more regulated market and that the Binance deal could help put that issue to rest.

“It was never going to be viable for the owner of an exchange to also own a proprietary trading firm that trades on that exchange,” he said.

Alameda chief executive officer Caroline Ellison declined to comment on the deal between Binance and FTX, and its impact on Alameda.

Overall, Walsh said FTX’s floundering will “massively increase the focus from regulators on all market participants” and draw more attention to whether tokens like FTT are unregistered securities.

Arthur Breitman, the co-founder of the Tezos blockchain, said in a statement that it will be interesting to see whether an acquisition of FTX by Binance will draw away support from major blockchains. He noted that FTX has been a major backer of the Solana blockchain, while Binance has its own Binance Smart Chain.

“I’m curious to see if FTX will continue to back Solana under the new leadership, or if they’ll pivot to BSC,” he said. Notably, the Solana token took a drubbing Tuesday, dropping 23%.

Avichal Garg, co-founder and partner at crypto venture capital firm Electric Capital, said that the potential deal demonstrates how “the incumbents can be disrupted very quickly in this space” and shows how Binance’s Changpeng “CZ” Zhao managed his cash well.

“There’s a great lesson for founders here on how to run a business,” he said.

If, in running that business, CZ eventually decides against going through with the FTX acquisition, there could be more turbulence yet. – Bloomberg

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