FTX.US, BlockFi halt withdrawals as ‘crypto’ fear goes viral

The FTX cryptocurrency exchange may have filed for bankruptcy protection but there’s no real defense against the sector-wide carnage this scandal has unleashed.

Among the more unexpected details that emerged in Friday morning’s Chapter 11 bankruptcy filing affecting FTX and around 130 related companies was the inclusion of the U.S.-based/licensed exchange FTX.US. Just one day earlier, FTX founder Sam Bankman-Fried (SBF) had insisted FTX.US was immunized against the spectacular failures of the dot-com mothership and its SBF-owned market-maker Alameda Research.

FTX.US abruptly stopped processing withdrawals on Friday, a step that followed the site’s Thursday warning that “trading may be halted” in a few days. That message remains on the site as of Friday afternoon and there’s so far been no update/explanation provided by FTX’s official communication channels.

SBF issued another tweet-thread Friday morning, insisting again how “really sorry” he is that he stole/lost billions of his customers’ deposits. SBF expressed hope that the bankruptcy filing “can bring some amount of transparency, trust and governance” to the situation, which is a bit like the captain of the RMS Titanic saying he really hopes some of you drowning don’t hesitate to book passage on another White Star liner in the future.

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

The Bahamas-based FTX confirmed Thursday that it was allowing Bahamian customers to withdraw funds but everyone else appears to be up the creek. That is, unless you know someone based in the Bahamas with both an FTX account and a desire to exploit the situation.

Late Thursday, the Twitter user known as Cobie revealed that someone with a Bahamas-based FTX account was using a workaround to withdraw “millions” from the exchange at the behest of customers based outside the Bahamas, who enjoy no such withdrawal privileges.

Cobie surmised that the process involved the Bahamas account creating a non-fungible token on FTX’s NFT marketplace, then selling that NFT to an FTX customer outside the Bahamas for the full value of their FTX account balance. Cobie joked that this might be “the first recorded case of NFT utility in existence.”

This type of subterfuge is, of course, highly illegal, but it seems that FTX users feel that if the head of the company can ignore the law, they might as well give it a shot. FTX’s official Twitter feed eventually gave a “thanks, on it” reply to Cobie, but the idea that anyone is still able to work the wheel of this sinking ship seems highly implausible.

Contagion

With FTX officially down for the count, the question now turns to who/what might be caught in its wake. As we saw from this spring’s collapse of Terraform Labs’ Luna/UST tokens, the ‘crypto’ world is highly incestuous and all eyes are on which inbred fools will be next to fall.

New Jersey-based crypto lending platform BlockFi—which was bailed out by none other than SBF this summer—announced Thursday that it was “not able to operate business as usual” due to the “lack of clarity” regarding FTX’s fate. BlockFi would be “limiting platform activity, including pausing client withdrawals,” which it noted was within its rights under its Terms of Service.

Two days prior, BlockFi co-founder/COO Flori Marquez claimed that the market turmoil was “something we have seen before and are used to managing.” Marquez revealed that BlockFi had “a $400MM line of credit from FTX.US (not FTX.com),” a distinction that doesn’t appear to mean much anymore. Outside of retweeting the company’s ‘limiting platform activity’ announcement, Marquez hasn’t tweeted since.

On Thursday, Genesis Global Trading, a subsidiary of the Digital Currency Group (DCG), announced that it had “~$175M in locked funds in our FTX trading account.” Genesis insisted that it “has no ongoing lending relationship with FTX or Alameda” and that the current situation hasn’t “impeded the full functioning of our trading franchise.”

Technically, that might be true, but only because Genesis, which lost around $1.2 billion following this summer’s collapse of the Three Arrows Capital (3AC) crypto hedge fund, got a timely top-up from DCG. Genesis sent letters to its clients advising them that it had received “an additional equity infusion of $140M” from DCG that (naturally) will position Genesis for “its next phase of growth.”

It’s highly ironic that DCG had to go into its pocket yet again to bail out Genesis given that DCG also owns CoinDesk, whose publication of Alameda’s asset-challenged balance sheet sparked the current crisis. One can only imagine the back-channel missives that DCG has issued to its otherwise pliant media asset.

Elsewhere, Voyager Digital, which filed for bankruptcy protection this summer and whose remaining assets were purchased at auction by FTX.US, said Friday that its assets would be going back on the block. Voyager said it was “in active discussions with alternative bidders” and, while it had around $3 million in tokens on FTX at the time of the bankruptcy, Voyager “did not transfer any assets” to FTX.US as a result of the previous auction.

Stocking up (or down)

The stock price of publicly traded U.S.-based exchange Coinbase (NASDAQ: COIN) rose nearly 13% on Friday, closing at $57.46. The shares had dipped below $46 on Thursday as panic reigned, but investors now appear to believe that the bankruptcy of FTX.US promises an influx of new customers for Coinbase. That’s a bit of welcome news following last week’s ugly Q3 report, which revealed more than $2 billion in losses through September 30.

The view wasn’t as rosy over at MicroStrategy (NASDAQ: MSTR), which closed flat at $175 on Friday after starting the week at nearly $270. Company founder Michael Saylor has transformed his company into a pseudo- exchange traded fund for BTC, which took a serious tumble this week. After starting the week just under $21,000, BTC is currently sitting below $17,000, although the token had dipped below $16,000 earlier in the week, so, you know, victory!

Saylor and his company hold around 130,000 BTC, which were purchased at an average price of $30,639. With BTC trading at barely half that value this week, any further downward pressure could force Saylor to reneg on his vow never to sell any of his BTC.

On the bright(er) side, recall that Saylor, who remains MicroStrategy’s biggest shareholder, made history during the dot-com crash for losing around $6 billion in a single day following revelations that he’d cooked his company’s books to inflate its share price. Well, rest easy, Michael… FTX’s collapse caused SBF’s net worth to plummet from around $16 billion at the start of the week to, well, nothing by Friday. Sometimes, it’s good to be #2.

Out damned spot and/or logo!

FTX’s bankruptcy announcement prompted the Miami Heat and Miami-Dade County to announce that they were formally exiting the 19-year, $135 million arena naming rights deal they’d struck just last year. The Mercedes-AMG Petronas F1 team didn’t wait for Friday’s news to “suspend” their sponsorship ties with FTX, confirming that the exchange’s logo will be gone from their car and “other branded assets” as of this weekend.

Tom Brady, the quarterback of the Tampa Bay Buccaneers who became the first NFL passer to top 100,000 total yards this week, memorably appeared in commercials promoting FTX. Both Brady and his now ex-wife Gisele Bundchen took major equity stakes in FTX last year as angel investors, both of which are now likely not worth the paper their divorce settlement is printed on.

Other notable athletes left holding worthless bags include Golden State Warriors star Stephen Curry and tennis phenom Naomi Osaka. Hopefully, comedian Larry David took cash for appearing in that Super Bowl commercial in which he memorably (and presciently) declared “I don’t think so” when told he needed to open an FTX acount.

Binance hangs out its washing

The question of who supplied CoinDesk with Alameda’s internal documents remains a mystery, but suspicions are high that it was rival exchange Binance, in particular, its founder Changpeng ‘CZ’ Zhao. Zhao’s announcement last weekend that Binance planned to dump hundreds of millions of FTX’s native FTT token onto the market sparked the frantic withdrawals that ultimately exposed FTX’s financial house of cards.

Since FTX’s demise—which followed CZ’s decision not to bail out his rival—CZ has declared that all exchanges should provide public disclosures of their digital asset holdings to reassure customers. Accordingly, Binance released a list of their token holdings this week, but it didn’t exactly receive the welcome CZ likely expected.

Values of all tokens remain volatile, but information supplied by Binance to Nansen showed nearly US$8 billion worth of BTC, $17.4 billion in the Tether (USDT) stablecoin and $600 million in Circle’s USDC stablecoin. But some of the largest slices of the overall pie represented Binance’s in-house BNB token ($16-17 million) and the BUSD stablecoin ($22 billion).

BNB is effectively the Binance equivalent of FTX’s FTT, a coin created out of thin air that has somehow risen to a fiat value of nearly $300. BUSD is technically issued by Paxos and CZ loudly insists that Binance supplies only “branding support” to the stablecoin even though, at the time of the coin’s birth in 2019, CZ referred to BUSD as “our native stablecoin.” Typically, this relationship was swiftly downgraded the moment regulators began asking questions CZ didn’t want to answer.

The original headline on Bloomberg’s coverage of Binance’s reserves warned that “almost half of holdings are in its own tokens.” The media outlet was subsequently contacted by Binance to enforce the ‘issued by Paxos’ mantra, resulting in a headline more in keeping with CZ’s worldview.

Tether: Suck it, Chile!

Meanwhile, Tether apparently decided to use the distractions of a crypto meltdown to issue its latest ‘attestation’ of the financial reserves allegedly backing the over $68 billion in circulating USDT at a 1:1 ratio with the U.S. dollar.

Straight off, it must be said that the “independent auditors’ report” isn’t an audit, merely a confirmation by BDO (the seventh or eighth firm to handle such duties in as many years) that the sums provided by Tether add up. That’s it. No independent probing of the actual reserves, just a nod that the numbers in one Tether-supplied column match the numbers in another column.

Tether recently declared that it had rid itself of all commercial paper (CP) from its reserves, a feat it claimed (as ever, without evidence) had been accomplished “without any losses.” This, despite the common perception that most of Tether’s CP was in dodgy Chinese real estate firms, a perception that Tether has hotly denied but could never refute by, say, undergoing a proper third-party audit.

This CP was supposedly converted into U.S. Treasuries, “direct exposure” to which now represents “over 58%” of Tether’s reserves. That would mean Tether possesses over $39 billion in T-bills, which would put it ahead of Chile but just behind Vietnam on the chart of the largest foreign holders of U.S. treasuries. And yet, even when Tether allegedly held only $30 billion in T-bills, no one in U.S. financial circles could recall any entity striking any such deals with Tether.

Considering that Tether’s general counsel is Stuart Hoegner, who once worked for the parent company of a crooked online poker company, and FTX’s chief regulatory officer Daniel S. Friedberg worked for the same company—and oversaw the coverup of an insider cheating scandal that stole millions from the site’s players—Tether’s ‘customers’ have a right to be concerned by the current crypto crisis. The fact that Alameda was the second-largest recipient of all Tether issued through 2021 doesn’t help.

Crypto bros are treating FTX’s demise as their own personal version of the 2008 global economic meltdown. If Tether is caught lying about its assets (again), the situation will more closely resemble the Great Depression of the Dirty Thirties.

In the meantime, talk is already buzzing about the possibilities of the FTX scandal making a seriously good movie. (Michael Lewis, author of Liar’s Poker and The Big Short, was reportedly shadowing SBF while researching a book on FTX, so the bidding for the movie rights to his tome has likely gone through the roof.) Twitter peeps have already suggested that Jonah Hill be cast as SBF, a recommendation that Elon Musk supports.)

All we need now is to find a way to somehow include Russell Crowe’s Maximus, because the question ‘are you not entertained’ has never seemed more appropriate.

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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.