Illustration by Mitchell Preffer for Decrypt
This week, the crypto industry witnessed one of the most sudden and devastating contractions of wealth in financial history. Sam Bankman-Fried’s $16 billion empire—which was built up through his exchange FTX and his hedge fund Alameda Research—ran to zero in five days flat, bankrupting 130 affiliated companies with it.
Naturally, it was all Twitter could talk about. Not only was the world’s favorite microblogging platform a vital conduit for people to air their thoughts on the matter, it also served as both the battleground and bulletin board to the crisis as it unfolded.
To cover all the responses in-depth is a mammoth task that would frankly be impossible within the format of an article, so instead, here’s a roundup of the most important plays from all the main actors along with the biggest responses from third parties in the industry.
The drama started last Sunday, when Binance CEO Changpeng Zhao said he would liquidate all of his exchange’s FTT tokens. FTT is the native token of FTX.
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books. 1/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
Several hours later, Zhao gave his reason for doing so.
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs. Onwards.
— CZ 🔶 Binance (@cz_binance) November 6, 2022
The tweet caused a bank run as customers began withdrawing funds from the exchange en masse. A whopping $6 billion exited FTX over the next 72 hours. To put it into perspective, the exchange ordinarily handled “tens of millions” in withdrawals on an average day.
By Tuesday, it became clear that FTX did not have the liquidity to handle the withdrawal requests; withdrawals were paused and things got juicy when Changpeng Zhao stepped in to bail out the exchange.
There is a lot to cover and will take some time. This is a highly dynamic situation, and we are assessing the situation in real time. Binance has the discretion to pull out from the deal at any time. We expect FTT to be highly volatile in the coming days as things develop.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
Bankman-Fried also announced the bailout at the same time over on his profile. Further down in his thread, he was thanking his lucky stars that he had a buddy like CZ.
2) Our teams are working on clearing out the withdrawal backlog as is. This will clear out liquidity crunches; all assets will be covered 1:1. This is one of the main reasons we’ve asked Binance to come in. It may take a bit to settle etc. — we apologize for that.
— SBF (@SBF_FTX) November 8, 2022
Later on that day, Zhao tweeted something foreshadowing the next day’s events. It looked like he was getting cold feet.
Two big lessons:
1: Never use a token you created as collateral.
2: Don’t borrow if you run a crypto business. Don’t use capital “efficiently”. Have a large reserve.
Binance has never used BNB for collateral, and we have never taken on debt.
Stay #SAFU.🙏
— CZ 🔶 Binance (@cz_binance) November 8, 2022
Then the shocker came on Wednesday:
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f.
— Binance (@binance) November 9, 2022
Changpeng Zhao elaborated on his reasons for the u-turn in a lengthy statement. He stressed his claim that none of his actions were part of a “master plan.”
In Bankman-Fried’s lengthy apology thread the next day, he stressed that he was trying to find alternate channels to raise the liquidity needed to make all the exchange’s depositors whole. Twenty tweets in, he congratulated Zhao.
20) At some point I might have more to say about a particular sparring partner, so to speak.
But you know, glass houses. So for now, all I’ll say is:
well played; you won.
— SBF (@SBF_FTX) November 10, 2022
The crisis concluded on Friday with the news that FTX filed for Chapter 11 bankruptcy. Alameda Research, along with the exchange’s American subsidiary FTX.US and roughly 130 affiliated entities will also be filing for bankruptcy.
Bankman-Fried has now resigned from his role as CEO and veteran bankruptcy lawyer John J. Ray III will fill his shoes. Ray previously shepherded Enron through its bankruptcy proceedings—a fitting parallel.
Later that day, Shiv Shrivastava, CEO of DeFi project Palladium, saw a bittersweet symbol of Bankman-Fried’s fallen empire from his balcony.
The industry responds
Throughout the week, several crypto companies disavowed any connection to the beleaguered FTX, including Coinbase, Circle, and Tether.
Coinbase CEO Brian Armstrong announced that his company held no FTT tokens or exposure to either FTX or Alameda. Armstrong blamed FTX’s liquidity troubles on “risky business practices, including conflicts of interest between deeply intertwined entities, and misuse of customer funds.” He also said a lack of regulatory clarity in the U.S. drove consumers towards offshore exchanges like the Bahamas-based FTX.
3/ I think it’s important to reinforce what differentiates Coinbase in a moment like this. This event appears to be the result of risky business practices, including conflicts of interest between deeply intertwined entities, and mis-use of customer funds (lending user assets).
— Brian Armstrong (@brian_armstrong) November 8, 2022
Jeremy Allaire, co-founder and CEO of stablecoin issuer Circle, denied exposure to FTX. He agreed with Armstrong and framed the crisis as a temporary aberration on crypto’s journey towards wider adoption and becoming something with utility rather than speculative value.
10/ The good news is that the foundations that have been built with crypto infrastructure and public chains give us the building blocks to now re-make financial services with radically more transparency than we’ve ever known.
— Jeremy Allaire (@jerallaire) November 8, 2022
Jesse Powell, the former CEO of the Kraken exchange, had some very barbed words to say about Bankman-Fried and his venture capital investors.
9/ Red flags:
* acting like you know everything after showing up to the battle 8 years late
* 9 figs buying political favor
* being overeager to please DC
* huge ego purchases, like 9-fig sports deals
* being a “media darling”, seeking out puff pieces
* EA virtue signaling
* FTT
— Jesse Powell (@jespow) November 10, 2022
Su Zhu, who co-founded crypto hedge fund Three Arrows Capital (3AC)—an early casualty of Crypto Winter—wanted Bankman-Fried to know he’s not alone.
There I was, surfing the wave of waves, next moment wiped out, board broken, rocks reefs everywhere
The sudden pain of business failure and loss of purpose, as a golden child of the industry + biz cycle more broadly, was as difficult as the ensuing ostracization and demonization
— Zhu Su 🔺 (@zhusu) November 9, 2022
Famous whistleblower Edward Snowden thinks FTX was a dud from the get-go, along with Binance and Kraken.
Custodial exchanges were a mistake.
— Edward Snowden (@Snowden) November 9, 2022
Republican Tom Emmer wanted folk to know that Bankman-Fried may have been getting help from regulators all along.
And Twitter CEO Elon Musk said Bankman-Fried set off his “bs detector.”
Accurate. He set off my bs detector, which is why I did not think he had $3B.
— Elon Musk (@elonmusk) November 12, 2022
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