Kalam Crypto #48: FTX Collapse: What, Why, and What next?

“Crypto didn't fail. A centralized entity that requires trust failed.” Talal Tabbaa

Ahlan wa sahlan, and welcome to the 48th edition of CoinMENA's weekly newsletter, Kalam Crypto. This week we cover the FTX collapse: What happened? Why did it happen? Could this happen to CoinMENA? And where do we go from here? Let's dive into this week's letter, and talk crypto:

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Global News 🌍

FTX Collapse: What happened? In last week’s newsletter, we began covering the FTX story. Unfortunately, it kept getting worse and worse, and we still don’t know the full extent of the story. Here is a rundown of the events that led to FTX filing for chapter 11 bankruptcy.

• Coindesk report reveals that Alameda Research’s (FTX investment arm) balance sheet consists of $14.6b in assets. However, a large portion of that was FTT, the token issued by FTX. ($3.66 of unlocked FTT & $2.16b of FTT collateral)

• Binance CEO CZ tweets that they plan to liquidate all their FTT ~$500m worth. (Side note: Binance was the first investor in FTX in 2019, and they exited in July 2021)

• This caused a bank run on FTX. Users withdrawing funds.

• Alameda Research drains wallets and sends them to FTX to shore up liquidity and defend FTT

• FTX eventually freezes customer withdrawals and goes dark for 6 hours

• FTX CEO SBF announces non-binding deal to be acquired by Binance

• After 48 hours of due diligence, Binance backs out of the deal saying, “the issues are beyond our control or ability to help.”

• FTX and several related entities file for chapter 11 bankruptcy.

• Bankruptcy filings revealed that  FTX has around $900 million in assets against $9 billion in liabilities. 

Essentially, FTX (the exchange) was funneling investor and customer funds to their trading firm, Alameda Research, for them to trade with. This is, of course, extremely illegal. Customer deposits are never supposed to be touched. Investor’s capital should never be transferred to another entity! To top it all off, they were using their own token, ‘FTT,’ as collateral against multiple loans.

Earlier this year, FTX raised $400 million at a $32 billion valuation from the biggest venture capital firms in the world, including Sequoia and Paradigm, who have both announced that they are marking their FTX investment down to zero.

The level of fraud FTX was engaged in was criminal, and the confidence in the crypto industry is understandably shaken.  

FTX Collapse: How could this happen?

FTX International is an offshore entity licensed in the Bahamas. They were established in the Bahamas precisely to avoid regulatory oversight. It is becoming increasingly clear that FTX was engaged in widescale fraud. The level of fraud would not have been possible if they were in a regulated market.

FTX Collapse: Could this happen to CoinMENA?

No, because we are a regulated exchange. This was always a priority for CoinMENA from day one. This is why CoinMENA was established under the Central Bank of Bahrain, with a robust regulatory framework and compliance requirements. We go through regular audits and have to submit periodic reports to the regulators. More importantly, we keep our user funds in segregated accounts, and we don't offer leverage or margin, which severely increases the risk profile of an exchange. We see crypto as a long-term investment and will continue to manage our risk prudently to build a sustainable and profitable business.

FTX Collapse: What next?

Crypto didn't fail. A centralized entity that requires trust failed. 

We need to get back to fundamentals. This is a massive hit to our industry, and will take a long time to earn back investor confidence. If crypto wants to become the future of finance, we can and must do better. The fundamentals of crypto, starting with bitcoin, is to be a trustless system. Meaning it is not required to place trust in a central entity, trust is in immutable code and smart contracts. 

This will undoubtedly lead to much more stringent regulation and reporting requirements. Bad actors like FTX were able to take advantage of regulatory arbitrage and establish their operations in less regulated jurisdictions. We welcome this at CoinMENA and hope this leads to increased scrutiny and oversight.

CoinMENA News 🗞

🔥$3,000 Giveaway!We are giving away three prizes to three winners: $1,000 in ETH, $1,000 in USDT, and $1,000 in XRP! To qualify, simply trade (buy/sell) for $25 or more before November 30, 2022, 11 PM Bahrain/KSA time. The more you trade, the more likely you are to win!   

Tweet of the week 🐥

Quiz Corner ✅ 

Last week’s question:The computers that process transactions for the Bitcoin network are commonly called:

Answer: Miners 

This week’s question: What is the name of the general ledger that tracks all bitcoin transactions?

1. Blockchain

2. The Gox Chain

3. Satoshi Square

4. Ledger Link

See the answer in next week’s newsletter.