Fall of a Crypto Titan Puts an Industry on Edge

The undoing of the crypto billionaire Sam Bankman-Fried happened on Twitter.

Over the last two years, the 30-year-old entrepreneur gained a reputation as one of the smartest, most trusted figures in crypto. He built his cryptocurrency exchange FTX into a $32 billion company. He spent hundreds of millions of dollars to prop up other struggling crypto companies. And he became a major political donor to Joseph R. Biden Jr.’s presidential campaign as well as a frequent, welcome presence in the halls of Congress.

Then, in a matter of days his young empire collapsed, and it was Mr. Bankman-Fried who needed the bailout.

In a shocking implosion that was a hammer blow to the crypto market’s credibility, Mr. Bankman-Fried said on Tuesday that he planned to sell his suddenly struggling company to an archrival.

Mr. Bankman-Fried fell at the hands of Changpeng Zhao, the chief executive of Binance, the only crypto exchange bigger than FTX. After reports circulated that one of Mr. Bankman-Fried’s other businesses was on shaky financial footing, a Twitter post by Mr. Zhao, who is known online as CZ, essentially started a bank run that crippled FTX. On Tuesday, Binance announced that it had agreed in principle to buy its biggest competitor, though it remains unclear whether the deal will go through.

“CZ executed a pincer movement,” said Lee Reiners, a crypto expert who teaches at Duke University Law School. “He surprised all of us.”

Many of crypto’s foundational myths have already been punctured this year, and Mr. Bankman-Fried’s rapid fall suggests that no company in this freewheeling, loosely regulated industry is safe from extreme volatility. As news spread of FTX’s collapse, crypto markets took a battering, with Bitcoin and Ether both dropping more than 15 percent since Tuesday.

On Tuesday, Mr. Bankman-Fried framed the Binance takeover as a measure to ensure that FTX customers did not lose their money. But the deal is not finalized and its exact terms remain unsettled, leaving open the possibility that FTX’s hundreds of thousands of customers could lose their funds and set off another crash in crypto prices.

“This episode highlights the vulnerability of the entire crypto edifice,” said Eswar Prasad, a Cornell University economics professor. “Even large and apparently financially solid institutions turn out to have fragile and shaky foundations that crumble at the least hint of trouble.”

A spokesman for FTX declined to comment. A Binance spokeswoman did not respond to a request for comment.

Unlike some other crypto companies that have imploded this year, FTX was almost mainstream. Mr. Bankman-Fried ran a commercial during the Super Bowl and bought the naming rights to the Miami Heat’s basketball arena. He was profiled in virtually every major news outlet, including The New York Times, and had nearly a million followers on Twitter.

“It’s like if the person you thought was Hermione turned out to be Voldemort,” the crypto journalist Laura Shin tweeted on Wednesday.

As the company collapsed, FTX’s venture investors were in the dark about Mr. Bankman-Fried’s plans, and employees had little guidance. Other companies scrambled to distance themselves. “There can’t be a ‘run on the bank’ at Coinbase,” Alesia Haas, the U.S. crypto exchange’s chief financial officer, wrote in a blog post. “We hold customer assets 1:1.”

In a note to Binance employees that was posted on Twitter, Mr. Zhao said that FTX’s demise “is not good for anyone in the industry.”

“Regulators will scrutinize exchanges even more,” he wrote. “Licenses around the globe will be harder to get.”

Until this week, Mr. Bankman-Fried, known by his initials SBF, was widely regarded as one of the industry’s most astute and formidable leaders.

In 2017, he founded Alameda Research, a crypto trading firm, that made a fortune exploiting arbitrage opportunities in the Bitcoin market. He parlayed that success into the creation of FTX, which was based in Hong Kong before relocating to the Bahamas last year.

FTX’s business was built on a type of risky trade — in which investors borrow money to make big bets of the future value of cryptocurrencies — that remains illegal in the United States. But Mr. Bankman-Fried started a smaller U.S. affiliate that offered more conservative trading options, while lobbying American regulators to approve the riskier model. As the company grew, he became a prolific political donor, contributing more than $5 million to Mr. Biden’s 2020 election effort.

He also embarked on a marketing blitz. In April, Mr. Bankman-Fried hosted a dazzling conference in the Bahamas, where he appeared onstage with former President Bill Clinton and former British Prime Minister Tony Blair. At one point, he was worth an estimated $24 billion, according to Forbes, making him the second-richest crypto businessman behind Mr. Zhao. Mr. Bankman-Fried vowed to one day give his entire fortune away.

When the crypto market crashed in May, Mr. Bankman-Fried was hailed as a savior. He lent the troubled crypto company Voyager Digital $485 million and bailed out BlockFi, a crypto lending firm, with a $400 million credit line.

But in recent weeks, he started to face blowback in the industry. He was criticized by crypto enthusiasts for supporting regulatory proposals that they viewed as an affront to the philosophical principles of the technology.

Then last week, the crypto publication CoinDesk reported on a leaked balance sheet showing that a large portion of Alameda’s assets consisted of FTT, a token that FTX had invented to ease trading on its platform. The news stoked fears that a plunge in FTT’s value could cripple both FTX and Alameda, which are closely entangled.

A former FTX investor, Mr. Zhao still held a large quantity of FTT, which Mr. Bankman-Fried had given to him to buy back equity in FTX. Mr. Zhao also seemed to be growing disgruntled with his colleague. In October, Mr. Bankman-Fried had made a joke on Twitter suggesting that Mr. Zhao was not allowed to enter Washington, an apparent reference to the scrutiny Binance has faced from U.S. regulators.

Over the weekend, Mr. Zhao announced on Twitter that Binance would sell its holdings of FTT. He insisted that he was not engaging in a “move against a competitor.” But he later compared the FTT token to Luna, a cryptocurrency that crashed in May, setting off a broader crisis.

“We won’t support people who lobby against other industry players behind their backs,” he added on Twitter.

The impact was immediate. Over three days, customers withdrew more than $6 billion from FTX. Mr. Bankman-Fried said on Twitter that “a competitor is going after us with false rumors.”

Around the same time, Mr. Bankman-Fried was calling possible investors as he tried to raise money, according to two people familiar with the conversations. But it was not clear how much he would need, one person said. The stakes were clearly high, though: Mr. Bankman-Fried explained that FTX was in an emergency situation, according to the other person.

On Tuesday, Mr. Bankman-Fried struck the agreement with Mr. Zhao. “Binance has shown time and again that they are committed to a more decentralized global economy,” he wrote. “We are in the best of hands.”

In his note to employees, Mr. Zhao said he was as shocked as anyone. “I had very little knowledge of the internal state of things at FTX,” he wrote. “I was surprised when he wanted to talk.”

But the takeover is far from a done deal. In a series of tweets, Mr. Zhao stressed that “Binance has the discretion to pull out from the deal at any time,” he said.

The companies still have to go through a due diligence process. Both FTX and Binance are based outside the United States, but regulators in other countries may try to intervene. “Every regulator is going to be looking for a way to exercise jurisdiction over this deal,” said Joseph Castelluccio, a lawyer who specializes in digital assets.

Among FTX employees, confusion reigns. Mr. Bankman-Fried announced the deal to staff around the same time the news was posted on Twitter. Employees in the United States and abroad were blindsided, according to two people familiar with the matter.

“I owe a huge debt to all of you for following me, and I’ll do what I can to make that right,” Mr. Bankman-Fried wrote on Tuesday in a note to staff, which was obtained by The Times. “I’m sorry.”

The fall from grace was also reflected in the size of his fortune. According to a Bloomberg wealth index, Mr. Bankman-Fried, now worth $991.5 million, is no longer a billionaire.

Sumber: www.nytimes.com

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