BONUS: The FTX story in detail – just what happened this week?!

Tracey: [00:00:19] Welcome to the Crypto Curious podcast designed to help you navigate the dynamic world of cryptocurrency. We're here for anyone who is interested in crypto at all. Maybe you already dipped it toe in the water, or maybe you don't know anything about it. And this is a very beginning, but we recommend heading back to the early episodes to get your footing. However, if you think you're ready to dive in headfirst, then let's do it. On this week's episode, we unpack the news you've undoubtedly heard about the demise of FTX, the exchange that was number two in the world. And what a story this is. My name's Tracey and as always, I'm joined by my mates from the bamboo app, Blake and Craig. Hey, guys. 

Blake: [00:00:57] Hey, Trace. How are you doing? 

Tracey: [00:00:58] Yeah, well, Craig, how are you going? 

Craig: [00:00:59] Great, thanks. I am underwater by a lot, so I don't check your portfolios. Does it? 

Tracey: [00:01:06] I don't know. We've had a bit of a bounce actually this morning, but look, we're doing a special episode and dropped this one a little bit earlier than normal because it has been a wild and bumpy few days. 

Craig: [00:01:17] And this is our first emergency podcast. 

Tracey: [00:01:21] Emergency broadcast folks. But we thought we needed to do this to just give everyone a complete rundown on exactly what has happened, not just the last few days, but the weeks or possibly a week or two leading into this and what has happened with FTX. So look, personally, I thought that there was only room for one big lunar risk type crypto event this year, but it turns out there was another one to come, an even bigger and more spectacular event, if you could believe it. And I, to be fair, probably couldn't. But let's get straight into this absolutely massive story that's taken a lot of people by surprise this week. Let's start by saying it's November 20, 22. And again, the world's second biggest crypto exchange is on the brink of bankruptcy. We're all pretty shocked, aren't we? 

Craig: [00:02:16] Yeah. I'm also shocked by how public the fallout was. Like, we'll go through it, obviously. But, you know, Twitter jabs from billionaire founders to each other, it all we are really in the wild, wild west as an industry. And very, very early on, just seeing it completely capitulate in front of our eyes as it's been something.

Blake: [00:02:38] Yeah. Watching it all unfold on a public forum like Twitter and seeing all the transactions, you know, being traceable on the public blockchain, seeing people's actions move around in real time. It's incredible. In traditional finance, you know, you wouldn't hear about this stuff until it's all done. So incredible to watch it unfold. 

Craig: [00:02:56] And CZ is now the daddy of crypto. He's now been crowned the daddy. 

Tracey: [00:03:01] Who is Craig? Because we've got a few there's a few different people in this story and we need to explain who they are to everybody.

Craig: [00:03:08] Okay. So CZ is the founder of Binance is a key character, the story, Trace and SBF, who we were referred to as well, Sam Bankman-Fried. He is the founder of FTX. So there are two main characters here, hero and the villain. 

Tracey: [00:03:26] Yeah, both people we've spoken about on the podcast a lot over the last year, so they are the two main characters in this story. So let's get going. So I think, like I said, this story does have quite a few twists and turns and quite honestly needs some explaining. So to give our listeners a rundown on how this played out, let's start with the backstory on FTX and Binance, because Binance is the number one exchange in the world. And number two, so do you want to give us a back story on those two, Craig? 

Craig: [00:03:59] Yes. FTX They were founded in 2019 and they quickly shot up to be the number two or the darling of last year's bull market. And even, you know, some this bear market, they've been offering to buy people out, but offering to rescue people. 

Blake: [00:04:14] Sorry, Craig, not people. 

Craig: [00:04:15] Companies and yet companies. Yeah, they tried to bail out companies. People weren't able to probably show, who knows? Chase Yeah, you're a user and I wasn't onto it. But yeah, I think they had very deep liquidity. You could get very good prices there and they had a very good UI, so they shot up the ranks quite quickly. Now where Binance came into it is that Binance were actually the seed investor to FTX. Early Days now says they invested in Sam and they were doing so well that Sam actually bought CZ out of his shares into FTT token, which as we've spoken about in the past is the exchange token that they use for awards they use. Burn. There's a bunch of things that they do with that. And yes, they sold his FTX equity for the token. How much was that, Craig? 2 billion. 

Blake: [00:05:09] Okay. So pretty good. Pretty good investment. He ceded it two years later. He got paid out 2 billion. So pretty good. Pretty good. 

Craig: [00:05:18] 2 billion at those prices. Now, I don't think so. 

Tracey: [00:05:23] Not right now.

  Craig: [00:05:23] That was not. 

Tracey: [00:05:24] Honestly at the time. A very good exchange.

Craig: [00:05:26] Yeah. Yeah. Now, there's another company we're going to talk about called Alameda Research. This was SBS first company he got. He started them in 2017. And they're essentially a trading firm similar to Three Arrows Capital. So Alameda was working quite closely with FTX and SBF as we have owns 90% of equity in Alameda. So this is worth noting is a big piece of the story. Chase Yeah.

Tracey: [00:05:52] Yeah. But let's leave that there and fast forward to early November, a few weeks back when things started to get a little heated on Twitter. So for those listening to our podcast, you'll know that a few weeks back, Blake and I talked about the fact that Sam's been spending a lot of time in Washington lobbying for crypto regulation and spending a lot of money on that, too, and in particular, regulation that would potentially suit. So apparently this is where he was really pushing the interests of just FTX and he says that he was negatively speaking about CZ and Binance, or at least that's what he thought was happening. And he posted as much on Twitter, which is where things started to get a little bit heated, but in tandem something else was happening as well.

Blake: [00:06:39] Blake Yeah, well, this was happening. There were leaked documents about Alameda. The hedge fund of FTC's Coindesk released an article showing the balance sheet of Alameda. So I don't know how they got this, but a large portion of their balance sheet was made up of their own FTT token that they created out of thin air. And it did have market value, but you're not that much liquidity. So you know who's to say if it was actually worth that much money or anywhere near it?  Craig: [00:07:08] Yeah, and I think the issue there is to unpack that a little bit more is that if they've claimed to have 5.8 billion of FTT token and the FTT token is only worth 3 billion because the tokens they claim to have aren't live in the market yet, then the tokens are essentially not worth that, because for you to sell those tokens, you have to crush. The price, which is what we're saying now. Mm hmm.

Blake: [00:07:35] Yeah. Alameda was using these tokens on their balance sheet to borrow money from X client funds. Customer funds to then use in their trading activities. Now, this is an extremely dangerous path to go down, because I would suggest that the terms and conditions on the platform on FTX say. 

Tracey: [00:07:56] Is illegal. 

Blake: [00:07:57] Yet that they're not doing this activity. And it means that you're Alameda messed up somewhere. They lost potentially billions of dollars and been trying to trade their way out of it with client funds and. 

Tracey: [00:08:09] They were working outside the terms.

Craig: [00:08:10] Yeah, well, the rumor mill is that Alameda was caught up in the Luna crash and SBF secretly didn't tell his teens until anyone to FTX. Look will give you this money to keep you afloat for now because if it comes out in the markets it's going to just delay the inevitable, essentially. 

Tracey: [00:08:31] Okay. Well, that's a bit of a rumour. So now we've got an unhappy C.C. who at this stage has, you know, like we mentioned, 2 billion worth of this FTT, which worked out to be 17.7% of the FTT token to potentially drop on the market, which is what he intended to do. And he made these intentions public on the 6th of November, stating due to recent revelations that have come to light, we've decided to liquidate any remaining FTT on our books. We will do so in a way that minimises market impact due to market conditions and limited liquidity. We expect this will take a few months to complete. Finance always encourages collaboration between industry players. Regarding any speculation as to whether this is a move against a competitor, it is not. Our industry is in its latency and every time a project publicly fails, it hurts every user and every platform. That was the line he gave Craig. 

Craig: [00:09:28] Yeah, exactly right. Says he's got a wind of this news element, his balance sheet. And there's actually a really good article that explains that and will put it in the show notes below. So he's got wind of this. Now he's selling. And now almost immediately in response, the Alameda CEO, Caroline Ellison, tweeted that they would publicly buy all of Binance's FTX tokens for $22. And at this point, FTX is probably around, you know, 23, 24, so she offered a low price to get the whole deal done. So they declined. And that's when we see FTT start to really spiral out of control and really go down. 

Blake: [00:10:08] Yeah, this is interesting that CZ declined this offer. You know, if you had the opportunity to get rid of, I think at that time his tokens would have been worth about $500 million USD. Why wouldn't he take it? Rather he wanted to sell the tokens on the market and then presumably crashed the price of the FTX token and then you're potentially adversely affecting alameda and FTX. 

Tracey: [00:10:35] He then a lot of people asked him that he he he there is a Twitter feed which I'll try and find and also put in a notes where he was asked that and there's a few different answers and he gives a kind of a little bit convoluted and there's reasoning why he wanted to stay on the free market. 

Craig: [00:10:50] I pretty much got the gist that he didn't believe that although he bluffs, he thought there's no way they could do that offer because he looked at the books. Yeah. No. 

Blake: [00:10:59] Yeah. Anyway, that's conjecture. So yeah, we can always speculate on that. So the next day is when the tweets in the public eye caused things to really escalate. It was now November seven, four days ago, and CZ tweeted The CEO of Binance Liquidating FTT Token is to manage our risk of learning from Looter who we've given support to before. But we don't pretend to make love after divorce. We are not against anyone and we won't support people who lobby other industry players behind their backs. So a bit of a shot there for him. See ID saying, hey, you know, I don't like the behaviour that Sam's been doing in Washington, you know, it's not good for the industry and he's basically saying that the FTT token is like Luna and we all know that, which is massive.

Craig: [00:11:48] That's when people really started to freak out because a lot of people would have been on both. Both of them. So that was the big thing. Yeah. 

Blake: [00:11:55] And as a result, SBF from Ex tweeted back saying A competitor is trying to go after us with false rumours. FTX fines assets are fine and this is when everyone really started to panic. 

Tracey: [00:12:08] That too many actually took that tweet down. He deleted it. 

Craig: [00:12:11] Goes to another panic station. 

Tracey: [00:12:13] And that it's actually at that point when Craig and Blake and I are in a group chat and it's at that point that we were actually in a group chat together than someone put in there that perhaps we should get our funds off FTX And I think that was on Monday, wasn't it? And I kind of thought, look, you know, it's probably. Probably nothing, but better to be safe than sorry. I got to say I was sceptical and as the boys have said I am and if excuse are a lot of us are using Binance as well. But I did take that advice and I did take my funds off and I was early enough to get my funds out of there. And it was the right choice because it is better to be safe than sorry in this environment. Yes. So the panic did set in then and I was lucky enough to get my funds out at that point. Yeah. 

Craig: [00:13:00] And then that's when the panic was really at an all time high and they had $6 billion and net withdrawals 72 hours. Banks were like they were just a shambles, it was taking a few people a while and then SPF tried to calm everyone down which has now been deleted. I think you know he tried to calm everyone down, deleted it and then probably threw it more on the fire. So he said a competitor's trying to go after us with some false rumours. FTX is fine as it's a fund which is now a meme that line FTX has more than enough to cover all holdings. We don't invest in client assets. We have been processing withdrawals and will continue to be heavily regulated. He also says at the end here, I'd love it if we could work together for the ecosystem. So he's sort of tail between his legs, freaking out a little bit, but then he deletes it anyway, so he ramps up the panic. 

Blake: [00:13:53] Anyway, now I'm on. On November eight, just three days ago, FTT plummeted well below the 22 tola threshold. The Alameda CEO Caroline offered to buy the FTT tokens from CZ and it sank to about $15 per token. Now, if Alameda his balance sheets were accurate, as alleged in the Coindesk report, the fund is most certainly insolvent now because of its FTT holdings. Now, there was deafening silence here, and FTX didn't say anything publicly for that whole day. 

Craig: [00:14:27] And then the real kicker kicks in because the withdrawal button, everyone's worst nightmare, goes grey and they have paused withdrawals. And now people that are stuck saying this is a bad idea. 

Tracey: [00:14:44] Yeah, I hadn't got my funds out. This would have been a nightmare. Yeah. 

Craig: [00:14:47] So the crypto Twitter was in peak war room, state names flying, people saying that, you know, I've got all my money on there. That was complete, another dumpster fire. So that is sort of where we're still at. But there's this bloated story which we'll go through. 

Tracey: [00:15:04] But we've reported so many times, you know, in the last few months that that salmon have been the white knight riding in to save the day to another falling company. And this time it was him that needed saving. He was in an absolute state. And at this point, things got so bad that he had to make the call they never wanted to make, and he had to ask finance for help. And it was shortly after this that an announcement was made, if to put this one out, saying a strategic transaction with Binance had been made. I'm not we weren't sure what that was. But then another announcement from SZ was out on Twitter saying FTX was in trouble. We bought them to save them. So everyone was talking, you know, the hostile takeover was complete. That's what it looked like anyway. 

Blake: [00:15:52] But the Binance deal was just for a letter of intent. It wasn't actually an acquisition, so they wanted to do due diligence on FTX to see what the balance sheet looked like, and what the state of play was. And unfortunately all they needed was 24 hours of looking at their books and apparently there was a hole that was too big to fill. Rumours have it at $10 billion and finance is now backed out of the deal. So this is a credible, credible blunder by FTX and the management team. I'm blowing a hole in their balance sheet without anyone knowing to the tune of potentially $10 billion and the tweet from CZ that said, you know, they were hoping that they could support and bail out FTX, but, you know, it was beyond their control and their ability to help. So pretty crazy stuff there. 

Craig: [00:16:41] Yeah, well, the rumour has another rumour mill. The takeover price was $1. All they had to do is fill the hole and the bond still said, don't be too big to fill. And this is actually a drama for SPF because Binance is probably the only exchange that could probably do this deal. There's none of those. There's actually X number two, Binance number one. So Binance, turning away from the deal, sort of tells you the key could have owned the whole market and you still said no and you could even tell by the language. When SBF tweeted, he said, You know, we're getting acquired and then says 20. He said, We're looking into it. We have the right to back out, you know, so you could sort of sense. Yeah, yeah, yeah. The desperation from the same point.  Tracey: [00:17:26] A deal all over again.

Craig: [00:17:28] Yes. And then sees he drops an internal email. It's, of course, getting leaked. I'm sure these exchange employees' inboxes are blowing up. 

Tracey: [00:17:37] No, no, I think that was on Twitter. He put it on Twitter. 

Craig: [00:17:39] On Twitter. Okay, cool. On the SBF, one got leaked. 

Tracey: [00:17:42] Yeah. And someone on Twitter said, Well, what was the summary of that one? 

Craig: [00:17:45] So below summary. He debunked rumours and memes on Twitter that this is part of a genius master plan. It wasn't. He said FTX going down is not a win for Barneys because it's bad for the whole industry. This is true. Consumer confidence is severely shaken. Regulators will not forget this. I think, you know, it's always been not favourable in the US government because obviously they have ties to China, the non-American American. So he's always had a bit of drama. Their employees should not sell their bags. So he's saying, you know. 

Tracey: [00:18:16] Insider trading.

Craig: [00:18:17] Insider trading is never, never, never a bad thing. Yeah, sure. Didn't want to comment on the sale, didn't have enough information. And he said, never use your token you credit as collateral. And then he further also said that he Binance and Binance is token had never been used as collateral. And then he said that Binance are now going to be releasing a proof of assets product on their platform where you can go in there and say, you know, he's already sort of started on that quite quickly. So yeah, CZ and Binance are also in damage control as well, trying to win back some of the confidence.

Blake: [00:18:50] Yeah, so that last point is a key one. And it's the same problem that sank Luna FTX. The token that FTX created was inappropriately used as collateral to borrow against for liquidity. The same thing happened with Luna and the collateral was used to back the US stablecoin and when it faced a downward sell pressure it just caused essentially the the company or the organisation to be margin called and then capitulation. A very fast, fast way to get to zero. 

Craig: [00:19:22] There's 100% going to be a movie about this time. 

Tracey: [00:19:27] And they said, Did you see that meme this morning that it was Jonah Hill that's going to fly? Sam. 

Craig: [00:19:35] I just remember Jenny Hill from Buffalo. She's so good. 

Tracey: [00:19:39] But it is true, though, you got those like Sam photos from early on and he's like bright eyed and bushy tailed and young, and now he's like this jittering, like, kind of heavy off looking. Sam is, like, definitely worn down, clearly stressed. Oh, look. Like. But, you know, honestly, how can a company that was worth 30 billion a few months ago, you know, raising billions from investors, making eight figures in revenue per day, suddenly now, you know, just gone, you know, liquidated? Stupidity and negligence. 

Craig: [00:20:09] Alameda also another part of the story as well. Alameda and FTX are huge investors in Solana and then Solana ecosystems like. 

Tracey: [00:20:17] Darling you're darlings.

Craig: [00:20:18] I had a whole layer of one ecosystem to pillage from and they still managed to get wiped out. So don't use leverage on kids. So I think that's a lesson in all this. 

Tracey: [00:20:29] What happens next then, Craig?

 Craig: [00:20:31] So Sam put out another tweet overnight which probably made it, but we may think.

Tracey: [00:20:36] Relief without excuses. Sorry, but he.

Craig: [00:20:39] Said I'm sorry. You know, I stuffed up. He pretty much concluded, you know, we'll put a link on our show notes to the thread, but can clear the elevators winding down elevator are no longer going to be a trading arm that he'll be running. And he also said that FTX the plan the way out is to raise cash so he's going to go the market and try to raise I don't know if any investors are going to take that, but he he says no promises there but that's his which is quite worrying he said that is that is why. 

Tracey: [00:21:11] If they can't raise successfully though they'll most likely file filed for bankruptcy and for Alameda and if the expenses websites are all down right now, the drawers are frozen and users are locked out of their funds, which is deeply depressing for anyone that's involved there. And most of FedEx's legal and compliance team have quit. So no surprises there. 

Craig: [00:21:34] Yeah, and actually some breaking news has just broken my mates, an editor at Cointelegraph. So this is the latest space. This story is the Bahamas securities regulator freezing all FTC's assets, the Bahamas Security Commission, because if the Exit International is based out of Bahamas, this has been a bit of a main. He, you know, owns half of the Bahamas. Apparently. He said FTX assets could not be moved without the approval of a Supreme Court appointed liquidator. So it sounds like this bankruptcy process is going to be dragging out now and that, you know, the withdrawal button not being grey is looking like a long way away. 

Blake: [00:22:18] Yeah. So the SEC, as well as the Department of Justice in the U.S. have announced that they're investigating everything as well as this. V.C. investors have taken a massive hit. Sequoia is famous. California based. The VC fund has already marked thrifty investments as zero. I've heard of other groups that had invested $500 million into FTX and also had hundreds of millions of dollars sitting on the platform. That's now vaporised and other big investors like Jump Genesis Paradigm will most likely all suffer from the FTC's contagion. You know, and then you know what's going to happen with all the acquisitions that FTX tried to make? You know, they have Voyager. They have the Blockfi. So not Blockfolio. 

Craig: [00:23:07] Blockfolio. Yeah. Yep, yep, yep. Oh, this is it. Guns. Damian When Blake says contagion, I think that's a really good point to sort of touch on because if you're a hedge fund and you're just taking a loss on FTX, obviously because it's worth zero and you're up on a, you know, a few other positions you're going to be looking to now sell to try to plug your hole to your investors. So this is when the whole contagion thing starts, where all of a sudden everyone is trying to chase their tail and it's creating a bit of a snowstorm. But a history, though, all of this marks the one year anniversary of all time highs this week. But also chase it. Did you know that the 2017 bear market was exactly the year? The same thing happened exactly a year. It marked the bottom. So take that information what you. But I. 

Tracey: [00:23:58] Did hear. Yeah yeah I'll take some comfort in that fact there. But let's try and find the positives right now because we like to try and find the silver lining in these kinds of activities. And look, we're all in favour of regulation and this kind of cements the reasons why we need some sort of regulation. So exchanges will face more regulation to come out of this, and they're going to be looking at things more closely. And customers will now demand to see, you know, proof of reserves and things, things like this. And, you know, to help with this as a few that have come out, you know, in the last 24 hours. Okay, Excu Coin and Binance and a few others have announced that they're going to be dropping this in the next month or so. 

Blake: [00:24:41] Yeah. And leading on from that, I think what we're going to see is more of a shift potentially towards decentralised protocols. You know, you basically yeah. You basically get what you're given with a decentralised protocol. The rules are defined, it's open sourced. Everyone knows you know what's going to happen. But when you're dealing with these centralised entities, you know, they can be this, for want of a better word, fuckery.

Tracey: [00:25:09] Well, that's it with Defi. It's all out there and in the positions made public, isn't it? You know, you're, you're bound yet, but you're bound by the code. You know, the code will liquidate you. The code will tell you what's happening. So all hail defi cements where we're going in the defi space when something like this happens. So what else are we grateful for?  Craig: [00:25:30] You know, I think SBF, all three of us trusted, the whole market trusted. And this is another example that you can't trust anyone. You have to be very careful. 

Blake: [00:25:43] Yeah, we're just in a really fortunate environment here in Australia where exchanges are really great and they don't offer leverage trading and they take it more of a conservative view. And as well as that there are other great trading exchanges out there like Coinbase who have their balance sheet as public record because they're a publicly listed company. So, you know, not all is lost. There are still great options out there for traders and for people participating in the sector. However, you know, this is going to, I think, make people a lot more conservative. 

Craig: [00:26:14] Yeah, I think this is like the Luna Mt. Gox moment in the markets where for sure we will get past this. And we probably look back on these times like we did in 2018, think we wish we, you know, with dollar cost averaging, we wish we were not in the news and not trading and not getting caught up in the hysteria and just getting a new hobby. Try to learn how to paint or something. I don't know. I might. I don't know. I might come up with a new hobby, play some golf. 

Tracey: [00:26:43] Yeah, give it a go. Look, we all three of us remain true supporters of this space and what it has to offer in the long term. We've watched how resilient the crypto market can be over the last few years, which is why we're confident that these type of bad actors will eventually be weeded out and allow the market to grow to what it was intended to be. In the meantime, as Craig said, we'll continue to practise what we preach, which in the bamboo model is to dollar cost average into the market over time. There's no such thing as, you know, get rich quick leverage is not your friend. We have all well a lot of us have learnt that I definitely have. 

Craig: [00:27:18] But also Tracey, when I when I called you yesterday in a panic, you gave me some really good advice. You said don't keep all your assets in the one place. Like don't keep all your assets on. Your Binance account, your metamask but your bambu. Spread it. Spread the love. Mitigate your risk. Because you just. 

Tracey: [00:27:39] Need wise words from. 

Craig: [00:27:40] Me. Wise words from Tracey. No financial loss. 

Tracey: [00:27:43] And that's it for this extra special episode this week. We'll be back with our regular news episode for you next week. And because this one is definitely sure to be a talking point, we'll jump in the Facebook group. If anyone's not in there, please join us today. Crypto curious Facebook group. There'll be some chatter in there for sure about this one and we'll put some links that we've mentioned in this podcast there and join in the chat for any questions that we maybe can help to answer. So again, thanks for joining us on this special episode and we'll see you again next week. Bye for now. 

Craig: [00:28:15] Bye bye.