With the holidays in full swing and the recent events surrounding the collapse of FTX unfolding across media outlets, we know crypto is a common point of discussion in most homes. This guide gives you all the information you need to have an honest discussion about what’s happening with FTX and what it means for crypto, whether that be with family, friends, clients, or otherwise.
People to know
Changpeng “CZ” Zhao – CEO of Binance
Sam “SBF” Bankman Fried – former CEO of FTX
John Ray III – Current CEO of FTX, former CEO of Eron
Terms to know
FTX token (FTT) – the native utility token of FTX.
Centralized exchange – a crypto exchange that’s operated by a centralized entity as opposed to a decentralized one.
Liquidity – how easily assets can be converted into cash.
Chapter 11 – a bankruptcy filing that allows protection from creditors given to a company in financial difficulties for a limited period to allow it to reorganize.
Who are Binance and FTX?
Binance and FTX are both centralized cryptocurrency exchanges. The CEO of Binance, Changpeng “CZ” Zhao, and CEO of FTX, Sam Bankman-Fried, often referred to as SBF, are both well known, outspoken voices in the digital asset space. Binance was founded in China in 2017, FTX was founded in the Bahamas in 2019. Both companies have since expanded into the United States.
Explaining what happened to FTX
For a full, minute-to-minute account of the FTX collapse, including price fluctuations, the relationship between CZ and SBF, and the mysterious drain on over $600 million in customer funds, check out this article from our Node Ahead series.
Why did FTX collapse? Basically, they had a liquidity crisis that they couldn’t recover from. FUD (Fear, Uncertainty, and Doubt) created by a tweet from Binance caused users to rapidly withdraw their funds from the FTX platform, and FTX didn’t have enough money to survive the withdrawals.
Not enough money to survive? How? Valid question, because just a few weeks ago they were seen as one of the major players in the exchange space, coming in second only to Binance. But FTX loaned significant customer assets to support the hedge fund of its sister company, Alameda Research. That loan was collateralized by FTX’s native crypto token, FTT, which was a volatile asset. When the FTT token crashed 90% in under 24 hours, that collateral evaporated and Alameda was unable to pay back the loan. When customers began to withdraw funds from their accounts, FTX was unable to meet liquidity demands. Imagine a run on a failing bank with no FDIC insurance.
Are they allowed to lend customer assets? They shouldn’t be lending customer assets without customer knowledge and agreement, and this went against their terms of service. So, not great.
So, now they’re bankrupt? Correct, FTX filed for Chapter 11 bankruptcy, which is a kind of bankruptcy filing that allows the debtor to continue business operations in hopes of restructuring.
Did the CEO step down? Yes, SBF resigned from the company and John Ray III, the same person who was brought in to clean up Enron, is the new CEO of FTX.
What does this mean for their customers’ crypto? That’s unclear at this point. Typically, a large part of the bankruptcy process will involve salvaging and returning customer funds through either acquisition or liquidation of company assets. At the moment, their customers are in the dark.
Why didn’t the SEC legislate this? FTX was an off-shore exchange based in the Bahamas, so the U.S. had no jurisdiction (note: this is why Onramp only works with nationally based, qualified custodians). Regulation in the crypto space is currently minimal but evolving rapidly in the wake of the recent centralized finance woes.
What this means for crypto
- Despite what it looks like, crypto isn’t broken. If you want proof of this, just look at decentralized exchanges and lending platforms like Aave, Curve DAO, and Uniswap, which have all been functioning with reliable liquidity for years. What we’re finding is that cryptocurrencies are still finding their footing in the centralized space, likely because these centralized exchanges are trying to make crypto fit into a traditional finance mold. Overall, the failings of centralized exchanges over the past few months were caused by people over-leveraging, not crypto itself. It all comes down to lack of fund management, which is why having guidance from a registered professional is so important.
- What prevents this in future? While no one can say for sure what will be the best solution for the centralized use of this growing decentralized asset class, it seems apparent that a little more transparency and regulation will go a long way. The government is working to build out more guardrails, but in the meantime, strides are being made to increase transparency in the industry through things like CoinMarketCap’s proof-of-reserves tracker.
- Is it still safe to invest? Just like anything else, investing is as safe as you make it. Crypto is here to stay, and how you engage it is your choice. Standard practices in traditional investing also apply to crypto, such as diversification of holdings and assets, DYOR, and careful management of assets. For all of these reasons, we recommend having a financial advisor when investing large amounts of capital. Advisors that use Onramp are able to work with multiple qualified custodians (so all of your eggs are never in one basket), and use model portfolios to invest your funds with optimal diversity.
How crypto is changing the world as we know it (for the better)
Digital assets are so much more than just money, and their use cases are growing every day. They’re already showing promise for economic growth (example: El Salvador), philanthropy in times of crisis (example: crypto airdrops when war broke out in Ukraine), stabilizing economies (example: stablecoins in Argentina), and so much more.
Well-known investment funds like Goldman Sachs, KKR, and Hamilton Lane are starting to tokenize their funds, which is increasing access and liquidity, allowing for near-instantaneous transactions and improving regulatory compliance. According to BNY, 75% of clients are either investing or actively considering investing in digital assets, and 90% of clients expect to be investing in digital assets in the next few years. These comments mirror similar findings recently put out by Fidelity, who reported that 81% of institutional investors believe digital assets have a role in a portfolio. More and more institutions, ranging anywhere from financial to entertainment, are incorporating crypto into their growth strategies.
Outside of institutional growth, crypto is providing equal access to investment opportunities that would usually be reserved for the very wealthy few. It’s breaking down barriers across country lines by allowing for instantaneous transfers of assets without remittance costs or middle men. Not only that, but NFT and smart contract use cases are expanding by the day. Now we know them for art and DeFi protocols, but one day soon we may know them for safe transfer of information, like medical data.
This is only the beginning, and we’ve only unearthed a small fraction of the potential of digital assets. There’s no limit to what they can do for us, and as opposed to the way that a few people may have put a stain on the centralized lending space, innovators and creators are building a safer, smarter, and more reliable digital asset space every day. We’re at the start of the growth cycle, so things are a little bumpy, the same way that they were with things like the internet. Think about how you use the internet in your daily life today, from ease of access to ease of use—it’s both a life-changing and equalizing force in our world. That’s the future we see for crypto.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed do not express the views or opinions of Blockforce Capital or Onramp Invest.