Dispatch #113: The Fiery End of SBF and FTX
In this patch of your weekly Dispatch:
- The shocking collapse of FTX
- OFAC changes tactics on Tornado Cash sanctions
- The rise of Proof-of-Reserves
The Big Idea
The Biggest Implosion in Crypto History
Over its lifespan, crypto has had more than its share of fiery Goxian cataclysms. This year alone saw the implosion of such formerly high-flying projects and firms such as Terra/Luna, Three Arrows Capital, and Voyager. Yet nothing could have prepared us for the shocking, less-than-a-week collapse of FTX and its wunderkind boss, Sam Bankman-Fried.
Most of us have been watching with rapt attention, but for those who missed the series of events, it went something like this:
- Over the last month, SBF aroused the ire of Crypto Twitter with his pronouncements on industry regulation.
- Last week, CoinDesk published an expose on SBF-aligned trading house Alameda that brought its solvency into question.
- Over the weekend, on Sunday, CZ announced that Binance would be dumping FTT based on those recent concerns.
- CZ’s comments initiated an exodus, as professional asset managers raced to get their assets off of FTX. SBF’s comments on Monday that Binance was maliciously targeting FTX did nothing to stem the bleeding.
- The bank run led to more than $6B in withdrawals from FTX in 24 hours before they stopped being able to process them.
- By Tuesday midday, SBF shocked the crypto world by announcing that Binance had signed a non-binding LOI to acquire FTX.
- By Wednesday afternoon, CZ had backed out of the deal and the WSJ was reporting that the hole on FTX’s balance sheet was $8B.
- On Thursday, the Bahamas securities regulator – where the crypto exchange is officially headquartered – partially froze FTX’s assets and moved to appoint a liquidator for one of its affiliates.
The situation is still rapidly evolving, but the emotions being processed by the crypto industry are as immense as anything we’ve ever seen. Disbelief, shock, betrayal, apathy, disgust.
All of these are completely valid right now as we try to process what’s just happened, but in times like these, we find it helpful to clarify how Nexo's business differs from that of others and to reflect on why we started working in this space in the first place. A belief in decentralization, peer-to-peer networks, permissionless options, and the ability for people to take control of their destinies. That matters as much today as it did last week.
The Latest In…
There is no doubt that the FTX implosion will have ramifications for US crypto regulation. Many are worried about a severe backlash. In the immediate term, the DCCPA that SBF had been lobbying so hard for appears dead in the water for 2022, and advocacy for alternatives has already begun. Also this week, OFAC changed its sanctions on Tornado Cash from sanctioning the smart contract to sanctioning the entity around the original creators of TC. Coin Center has said that the change will not change the substance of their lawsuit against the Treasury Department.
The Latest In…
The Trend Towards Proof of Reserves (Pioneered by Nexo)
While many of the details are being sorted out, there is a widespread belief that FTX was using customer funds they had claimed were backed 1:1 to make loans to Alameda Research to allow Alameda to trade. This has renewed calls in the industry for proof-of-reserve attestations. On Tuesday, Binance’s CZ committed the firm to PoR, and within 24 hours most everyone else seems to have started joining the call.
The Latest In…
At Nexo, reserve attestations have long been a primary pillar of customer protection and transparency, and we are glad to see so many others in the industry come to the same conclusions.
Speaking to Bloomberg’s Matt Miller and Kailey Leinz on Thursday, our Co-founder Antoni Trenchev said that Proof of Reserves is indeed one of the ways forward that could drive the space out of this mess. So we keep challenging other responsible companies in crypto to follow in our and Kraken’s footsteps and perform real-time attestations for the betterment of our industry. Check out Antoni’s entire appearance and his correctly predicting FTX wouldn’t be bailed out before filing for Chapter 11.
The Latest In…
What a Bank Run Looks Like in Ethereum Gas
Before FTX halted withdrawals, it was processing a shocking number of withdrawals - more than $6B in a single day. One interesting way of visualizing that is to take a snapshot of Ethereum gas fees over the period in question. In the chart below we can see the withdrawals (expressed in gas fees) spike after CZ’s comments on Sunday, before trickling to almost nothing as withdrawals were halted Tuesday into Wednesday. Our hearts go out to everyone who has assets stuck with FTX. Here’s hoping for a speedy resolution for all their customers.
What the Community Is Discussing
The OFAC Tornado Cash pivot would have been top news any other week.
This is…weirdly comforting?
What to Watch for Next Week:
- How far will the fallout from FTX’s failure go?
- Will a new Congress and Senate try to push crypto legislation?
- Will NFTs keep vibin, not caring?