Binance CEO CZ has announced that the exchange is dumping its FTT holdings following revelations about the Alameda/FTX relationship Alameda’s $14.6 billion in assets is 40% FTT, the native FTX token as Alameda’s $8 billion liabilities are named Bankman-Fried founded Alameda and FTX, but defended conflict of interest FTT volume is low – illiquidity would prevent Alameda from selling its FTT Alameda offered to buy the CZ’s FTT at $22 per token as concern grows that selling pressure will sink the market CZ says it will take months to sell My question is why is cryptocurrency going through this again? We live in a blockchain world, how hard is it to put all this on a blockchain? Not again. With the PTSD of the summer contagion still being prominent for crypto investors, when apparently half the industry has gone mad, now everything is looking like déjà vu. And who will play the villain role this time, only FTX, the alleged white knight who stepped in to save the day with last-minute ransom offers from Celsius and BlockFi companies.
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What happened?
In the past – and in terms of crypto, which is just a few years ago – Binance helped incubate FTX, which today presents itself as its biggest competitor. They exited the equity position last year, receiving $2.1 billion for their good investment. But this was not paid in cash, instead they received the payment split between stablecoin BUSD and, crucially, FTX’s native token, FTT. The problem centers on the payment received in the FTT token. CZ, CEO of Binance, announced on Twitter that “due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books.” He added that “we will try to do it in a way that minimizes the impact on the market. Due to market conditions and limited liquidity, we expect this to take a few months to complete.”
As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that they have come to light, we have decided to liquidate any remaining FTT on our books. 1/4 — CZ 🔶 Binance (@cz_binance) November 6, 2022
What are the revelations about the FTX?
CZ’s announcement is in response to a CoinDesk story about the balance sheet of trading company Alameda Research. Alameda is (more or less) a sister company to FTX, although the details are a little more obscure. The hedge fund/trading firm was founded by Sam Bankman-Fried, the same Sam who leads FTX, who has long struggled with questions about the conflict of interest between these two companies. Exchanges live and die by their liquidity, and it’s the hardest thing to get when launching a new exchange. Traders will follow liquidity, but when you start with zero liquidity, you don’t win them. And, by definition, liquidity only comes from traders. So it’s like a perverse chicken-and-egg problem. Bankman-Fried solved this chicken-and-egg problem by channeling a load of trades from Alameda through FTX, thereby increasing liquidity. Soon, FTX was racing-ready, its growth phenomenal (launched just three years ago, with Bankman-Fried catapulted into the billionaire club in his twenties). The issues surrounding a conflict of interest revolve around what information Alameda sees in the market that regular traders do not. Bankman-Fried backed off, but the reality is that Alameda is one of the biggest providers of liquidity on the exchange and actively trades against clients. Assuming everything is honest, the conflict of interest is still easy to see.
Alameda is a liquidity provider on FTX but their account is just like everyone else’s. Alameda’s incentive is just for FTX to do as well as possible; by far the dominant factor is helping to make the trading experience as good as possible. — SBF (@SBF_FTX) July 31, 2019
But there are other stories tangled up between the two. Although they are “two separate businesses,” CoinDesk reported that “the split falls apart in a key place: on Alameda’s balance sheet, according to a private financial document reviewed by CoinDesk.” Alameda’s assets totaled US$14.6 billion as of June 30, of which US$3.66 billion was “unlocked FTT” and US$2.16 billion “FTT collateral”. I’ve outlined the asset breakdown below, which includes a heavy dose of Solana, the cryptocurrency in which Sam Bankman-Fried was an early investor and remains a vocal advocate. Obviously, this is a very worrying balance of intensely correlated instruments. But it’s really the FTT token that stands out, taking up a staggering 40% (between locked and unlocked allocations). After all, FTT is a token created by FTX.
How concerning is the FTX token?
It’s not just the incestuous ties between the company, nor the fact that FTX was printed out of thin air and now takes up 40% of the balance sheet. Because there is a liquidity problem here as well. As I write this, the market cap of the FTT token is $3 billion (according to CoinMarketCap) and the fully diluted market cap is $7.9 billion. And now you see the problem – Alameda holds $3.7 billion of that market cap, along with another $2.2 billion in “FTT guarantee” – for which your theory is as good as mine, because why not? I have no idea what that means. Other assets mentioned in the CoinDesk report also do not eliminate the concern. SRM is one of them, which is the native token of the decentralized exchange Serum founded by, you guessed it, Sam Bankman-Fried. There are three other tokens mentioned – MAPS, OXY and FIDA. I’m not going to pretend I know much about this, but that alone sums up the problem. Again, these are highly illiquid – much more so than the FTT. And so, the big question points to the liability. FTX has liabilities on its balance sheet totaling $8 billion, of which $7.4 billion are loans. I was unable to track down more information about them, but there is no doubt that this number presents itself as worrying when compared to the illiquid assets analyzed above. I need to say that FTT is mentioned among the liabilities. This would ease the fear considerably, as the same issue of “phantom” assets could apply on the liability side. But we have no idea what most of the liabilities are. While I don’t think for a moment that Alameda could be insolvent, the end-of-the-world scenario is a liability side full of fiduciaries, as the asset side simply cannot be liquidated en masse to meet liabilities. Arguably, this is erroneously exaggerated given the ties to FTX and the fact that FTT can be printed out of thin air and has such low liquidity. This graphic says it all. Daily volume for the last 6 months averaged $25 million, before this week’s spike as this story began to gain ground. There is simply no way for Alameda to liquidate a significant portion of its FTT holdings without sinking the market price. Therefore, their assets on paper far exceed their real-life assets.
So what happens when Binance sells?
So, CZ is scared by the revelations surrounding the FTT token. The perception of underlying lack of value is one thing, but creating it out of thin air and using it to sustain balance sheets is another. Then comes the sell order. Interestingly, CZ gave the cryptic tweet that “we will not support people lobbying other industry players behind their backs”, suggesting that there is more than concerns about the Alameda/FTX relationship.
Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won’t intend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs. Onwards. — CZ 🔶 Binance (@cz_binance) November 6, 2022
And while we don’t know how much of Binance’s $2.1 billion shares of FTX are denominated in BUSD and FTT, there is no doubt that it is substantial compared to trading liquidity on the market – at $500 million. of the total rumors. That’s why Alameda CEO Caroline Ellison made an offer to buy CZ’s entire FTT bag at a price of $22 per token. At the time of writing, the market price is $22.20. CZ acknowledged the liquidity situation, stating that it would take several months to complete the sell order. https://twitter.com/carolinecapital/status/1589287457975304193 She had also previously moved to clarify that the balance sheet mentioned in the CoinDesk report was incomplete, although this did not dissuade CZ from selling.
My thoughts
As is common here, there is a frustrating lack of clarity. Ellison’s comments that the balance sheet is incomplete show this. But let me ask you this – in an industry built on blockchain, why is there so often a problem with transparency? Why can’t we have these big players present their holdings and balance sheets on-chain for all to see? We saw the same during the Terra fiasco, with no one being sure what capital Luna Foundation Guard had, which was desperately deploying Bitcoin to defend the peg collapse. And again – we have this déjà vu – the whole thing is more incestuous than a Lannister family reunion. Alameda holding FTT tokens, launched by FTX, which were invested by Binance, which was paid out in FTT. From the outside, looking in, this is crazy. It was the same with Three Arrows Capital holding Luna. And BlockFi also had exposure. And then Celsius and Voyager Digital. And the list goes on. They all had exposure to each other, with Terra and some Bitcoin dumped – a nasty downward spiral that went down like a house of cards. I don’t think this is the case here. FTX looks OK and I believe Alameda has some organization. But the above information is troubling, and it’s ridiculous that I have to speculate about it in the first place. Not to mention the tangled bond between the two isn’t healthy for everyone involved. This is just a guess. Of course, we do not have information on Alameda’s balance sheet liabilities. If it’s $8 billion in fiat, then there might be a problem. But again, we don’t know. This is cryptography, so why can’t we just put it on the blockchain and stop opining about it on the Internet? We’ve seen this movie many times and it’s getting tiring.
