FTX is worse than Enron?

November 18, 2022 Stan

Together With

Have you ever heard of the Cockroach Theory?

When bad news is revealed to the public, more negative news are expected to follow close behind. I didn’t realize that FTX roaches would be so gigantic and be able to fly.

Today, we’ll dissect everything that has happened since the FTX implosion last Thursday.

📉 THE MARKETS

Total Crypto Market Cap: 867B
BTC Price: $16,700.67 (+5.9%, 7 days)
ETH Price: $1,210.73 (+10.6%, 7 days)
TVL in DeFi: $42.55B
Fear & Greed: 20 (EXTREME FEAR)

“The desire to perform all the time is usually a barrier to performing over time.” – Robert Olstein

FTX insiders, Whales, & Bankruptcy

FTX disabled withdrawals on November 8th. A few days later, people noticed that millions were leaving FTX’s wallets. 🤔

FTX’s Twitter stated that they withdrawals for local Bahamians were the exception due to Bahamian HQ’s regulations.

1) Per our Bahamian HQ’s regulation and regulators, we have begun to facilitate withdrawals of Bahamian funds. As such, you may have seen some withdrawals processed by FTX recently as we complied with the regulators.

— FTX (@FTX_Official) November 10, 2022

Plot twist: There wasn’t any such pressure from Bahamian regulators.

Securities Commission Addresses FTX Statement on Bahamian Withdrawals pic.twitter.com/OZKWwicSuN

— Securities Commission of The Bahamas (@SCBgov_bs) November 12, 2022

So, what happened? One prevalent theory is that SBF wanted to give insiders a chance to withdraw their funds prior to FTX filing for bankruptcy.

Some whales had a massive amount of money locked in FTX. They were able to find an interesting loop hole to get their funds out.

Here’s a simplified version of how it worked:

Find a local Bahamian person with an FTX account.
The Whale Transfer the stuck funds to them by purchasing NFTs (it was still active at the time.
The local person can withdraw the funds, and send the cash to the Whale (minus their commissions).

As you can imagine, Crypto Twitter is livid. Some people side with the whales…(you’d do the same they said). While others feel they cheated the system and should be thrown in jail.

FTX Gets Hacked

My reaction Saturday morning

*wakes up*
*10 min meditation*
*journaling and gratefulness*

“Ah, I’m glad that the worse is almost over and Crypto can move forward”

*opens Twitter*

“nooo….noooooo…..
WHATTT THHHE FUCKKKKKKKKK!!!!!”

— Edgy – The DeFi Edge 🗡️ (@thedefiedge) November 12, 2022

On Nov 11, FTX filed for bankruptcy.

1) Hi all:

Today, I filed FTX, FTX US, and Alameda for voluntary Chapter 11 proceedings in the US.

— SBF (@SBF_FTX) November 11, 2022

Right after that, FTX was hacked. About $650M was drained from the exchange.

No full clarity exists on the situation as of yet. However, it is thought that:

A blackhat hacker stole around $450MM to become the 36th largest holder of Ether. Millions of stablecoins were swapped for Ether.
The remaining $200MM were sent to another pair of wallets. They appear to belong to FTX, a sure sign of them rescuing some of their funds.

Who’s behind the hack? Could be an ex-employee. Some are speculating that SBF is the blackhat.

Some of the funds were also moved across to the Kraken exchange. Kraken claim to know the identity of the hacker, and may reveal it in time.

Exchanges and proof-of-reserves

Soon, all exchanges started coming under immense scrutiny.

Consensus was reached that all exchanges needed to urgently present proof-of-reserves. Don’t tell us you’re solvent – SHOW ME THE MONEY ONLINE!

Exchanges responded. Binance and Crypto.com led the way by releasing a few wallet addresses as crude proof-of-reserves. But quickly, red flags began to emerge.

In essence, many on-chain transactions indicated that Crypto.com and Gate.io might be “sharing” funds.

Crypto.com sent 320,000 ETH to Gate.io on October 21st, just one week before publishing its proof of reserves.
On October 29th, Gate.io returned 285,000 ETH to Crypto.com. Afterwards, Crypto.com released its own proof of reserves on November 12th.

In this particular case the whitelisted address belonged to one of our corporate accounts in a 3rd party exchange instead of our cold wallet. We have since strengthened our process and systems to better manage these internal transfers.

— Kris | Crypto.com (@kris) November 13, 2022

Crypto.com’s CEO claimed that those transactions were a “mistake” while transferring funds to cold storage.

Suspicious…extremely suspicious.

Regardless, people have started withdrawing funds from these exchanges.

By the way, if you want to see onchain reserves, check out DeFiLlama.

.@DefiLlama shipped a new feature to show off CEX reserves.

Clean TVL means it excludes tokens that the exchange issues itself. pic.twitter.com/5g4IAn5MSE

— Edgy – The DeFi Edge 🗡️ (@thedefiedge) November 15, 2022

Solana is Falling on Hard Times

SBF and Solana have had a long (in crypto-time) history together.

Apart from launching multiple (low-float, high-FDV) Sam coins on the chain, Sam was also a project investor through Alameda Research.

Apart from the $FTT token, $SOL took the biggest hit: more than half of its value was lost.

In response, the Solana Foundation published a blog post detailing the ties between Solana and Sam Companies.

The Solana Foundation had around $1MM worth of cash or equivalent assets on FTX, which are now stuck.
They also hold around 3.24MM shares of FTX Trading LTD common stock and around 3.43MM $FTT tokens and 134.54MM $SRM tokens.
In exchange, Sam companies have purchased over 50.5MM SOL from the Foundation, though much of it is locked up behind monthly unlock schedules.
Around $40MM worth of Sollet assets, wrapped versions of Ethereum and Bitcoin backed by FTX, are also impacted.

This has already been a wild year for Solana with the wormhole hack and the network going down 8+ times.

Could this be the nail in the coffin for Solana?(I personally don’t think so.)

Other Dominos

What we’ve covered is just the tip of the iceberg. A lot of other lenders, VCs, trading firms, etc. were also involved with FTX.

BlockFi, Multicoin Capital, and Sequoia are some examples. In the coming weeks, we’ll be able to see how all these institutions are affected.

If this is really the end of Genesis, it will have its own domino effects. And those dominoes will have their own dominoes. And on and on. Until everything is cleaned.

The FTX Bankruptcy Report

I was just about to hit the *send* button on this email, but then a new report came out.

You know how Enron’s the benchmark when it comes to fraud? It looks like this is much worse.

The appointed restructuring CEO for FTX, was in charge of restructuring Enron. He says that FTX is the worst thing he’s ever seen.

Some highlights from FTX’s Bankruptcy Report:

They barely of any records of cash on hand or who they employed.
Alameda research gave SBF $1B in a personal loan. The director of engineer, Nishad, got $543 million.
The acting CEO says that any “audited” financials should not be trusted.

I’m shocked at how such an amateur operation could attract so much respect and money.

Don’t take my word for it. Here’s a link to the full report.

TOGETHER WITH BLUEJAY

BlueJay is bringing Decentralized Local Stablecoins to Asia

The usage of Stablecoins keeps growing each year.

The problem? 99% of stablecoins are denominated in USD. This is fine for Americans, but it’s limiting for people living elsewhere.

(They can lose money to foreign exchange rates and high conversion fees.)

This is an opportunity for non USD-backed stablecoins.

One protocol working on this is Bluejay Finance. They are the first Asia-focused, capital-efficient protocol for multi-currency stablecoins.

All over the world, especially in Asia, there’s a large unbanked population desperate to access financial instruments and send money easily.

Bluejay aims to bring stablecoins to the real world, accelerating financial inclusion for all.
They’re partnering with trusted protocols such as Goldfinch, Jia Finance, and others to bring stablecoins to real-world businesses.
Bluejay offers an alternative to USD stablecoins

Check out Bluejay and learn more about BLU bonds and Blue staking here.

Go Deeper into the FTX Rabbithole

A reporter from Vox interviews SBF via DMs. It looks like he’s still in denial and regrets filing bankruptcy. He thinks he could’ve made it all back through trading.

Here’s a first-person account of what it was like to work for SBF. I’m pretty sure this might not have been the case for many people. But, this account does shed some light on how the companies were operated.

More people clamoring for more “crypto regulation”. These people are putting CeFi and DeFi in the same category. In this article, Bankless makes the case that the FTX saga is an argument FOR DeFi, not against it.

Crypto community isn’t the only community SBF screwed over. The Effective Altruism movement, which was gaining massive political clout and intellectual legitimacy, also faced a huge set-back. Bismark Analysis looks at FTX saga’s impact on EA movement as well.

What a wild week!