Losing 32 billion dollars that’s what the crypto exchange is. FDX was worth at its peak but last week the platform collapsed, and on Friday the company filed for bankruptcy. This means people have lost a lot of money even one of Canada’s major pension plans, has been caught up in the chaos today. Ethan Lou is back on the show he’s an editor in the globe’s report on business. and the author of the book was once a Bitcoin miner. so he’s here to explain the humiliation of the FTX crash. This is the decibel from the Globe and Mail. Ethan thank you so much for joining me today, oh it’s a great pleasure. You’re quite involved in the cryptocurrency world in fact you’ve actually written about your own personal adventures with Bitcoin. so what did you think about this week when you heard the news that crypto exchange FTX had essentially collapsed? I was absolutely shocked because this is a story that we have heard before. with other collapsed crypto operations uh those were by people from whom, we never expected much. but Sam bank man freed the guy behind FTX he was the Golden Boy. He plants on stage with Bill Clinton and Tony Blair, and he was supposed to be the Lord and savior of crypto. and this was not supposed to happen to him. wait so Laura you said he was supposed to be the Lord and savior of crypto. why why that description well so he has this effective altruism thing? he wants to make the most money so that he can donate all of it to charity to better the world. This endeared him to lots of people and so figuratively, he was like this face of crypto.
The former CEO of FTX resigned
FDX was going around bailing out other bankrupt firms. it was literally going around saving people, wow and Sam Beckman freed, who’s now the former CEO of FTX resigned on Friday, and he seems to look like quite a character too. Can you get give us a sense of I guess kind of his persona? he definitely an eccentric rich guy. he’s very quirky he likes to sleep in a bean bag in his office. he’s a billionaire but that’s how he spends his nights. He wears very casual clothes just t-shirts and shorts. He appears on stage with all these. World leaders and there’s this quite famous picture of him and two supermodels on stage. He was just there wearing his very casual clothes. He’s got kind of wild hair too. I think of the pictures I’ve seen of him like he looks a little disheveled. I just want to really set up really what we’re talking about here, where the significance of what’s been going on with FTX. Do we have a sense of how much of user’s money has actually been lost here? The company’s worth 32 billion and right now lots of its investors have written down their investment to zero. So 32 billion is gone. how much of the customer’s money is gone, it’s hard to say but it’s definitely a lot. It’s also not just customer money because people have invested in FTX. So the Ontario teacher’s pension fund and lots of other such big mainstream investment houses across the world they’ve all put money in FTX and FTX. when it was big it also invested in other people. so I would expect these Ripple effects to happen yeah the pension plan that’s a big thing for sure. I think it was 95 million U.S. that the pension plan teacher’s Pension Plan actually put in that was first reported by our colleague Timur Durante. that sounds very significant, and let’s just back up for a moment.
what exactly is a crypto exchange?
Just reminding you what exactly is a crypto exchange? so essentially it’s a platform on which you buy and sell crypto. So you can deposit dollars and you use that to buy crypto, you can deposit crypto and sell that for dollars. But just like how a bank is a place that lets people borrow and lends money to people customers treat them like banks as well. Because they leave their crypto on their exchanges. which lots of Hardcore crypto folks will tell you that’s a very bad thing to do. because as you can see FDX is not giving people back their money. Now can you help me understand why didn’t they have the funds to do that well, I think to be fair to them most banks don’t have the funds to reap to pay people? if they withdraw their funds all at once then what do banks do? you deposit a hundred bucks, The bank I think in certain places regulations say, they have to keep 10 percent but the rest of that they lend out. So did FTX have any reserves here? Do we know the events have shown that they probably don’t have many reserves, and this is a thing that people have complained about with respect to exchanges? because regulations are so spotty,
Let’s dig into what’s been happening in the last week.
Here with FTX where did things really start to go badly for FTX? I will go from the big picture to the small so essentially, this is a bank run and this usually happens when people lose confidence. in the operation, so that would be like a bank run essentially when people are trying to withdraw their money at the same time. The thing that sparked this was a coindesk report which is a crypto industry news source. it reported that the sister company of FTX is called Alameda research. and it’s not really a research firm it’s more like a trading investment firm Alameda research. Today is a quantitative trading firm in crypto. We trade you know a bit over a billion a day on average. obviously, that number goes up and down with Market volumes and volatility, and its balance sheet is full of this thing called FTT. which is a coin created by the exchange and there’s nothing untoward about that by itself. Lots of exchanges have their own coins and these coins can be worth a lot of money. But the perception was that there is a great commingling of funds and it was badly run. People are thinking like the value of this company is trumped up and so we better get our money out.
FTX in Alameda research and finance
So just helping and exactly why people were concerned that a lot of Alameda’s assets were tied up in the FDX cryptocurrency. well, it just shows bad accounting practices and there appears to be co-mingling of funds. so it appeared that customers’ deposits in FTX somehow were in Alameda research and finance, that is something you are not supposed to do. so it sounds like this coindesk report that you mentioned shows Alameda research. I guess the finances essentially that we’re at play here is what prompted people to lose faith in FTX. Then yes and these things I think go in Spirals, and so when a small group of people loses faith and they want to withdraw their money. They lose faith and they want to withdraw their money so it goes on and on. FDX did not have enough money on hand to process the withdrawals and CZ kind of added fuel to the fire. when he said binance which held a lot of FTT tokens, was going to sell all of it. so there are characters we were talking about here, sandbag man fridge. Then this guy CZ he’s the head of a different crypto exchange called Binance.
Sam bankman free tried to find ways to have the funds
I think the crypto world is full of them he was born in China, but he is a Canadian. He had founded binance outside of Canada and finances under investigation by nearly every arm of the U.S. government. He added fuel to the fire and that massively devalued FTX caused a lot of problems for it after the bank run with FTX.
Where people were trying to take out their funds. what actually happened Sam bankman free tried to find ways to have the funds to process all these withdrawals. And one helping hand came from CZ and this is quite ironic. Because Sam burst into the scene last year when he spun out from Binance, and essentially Sam’s bankman was freed. he said I’m going to buy out binance a stake in FTX because I think binance is too shady. I want to be clean I want to be pleasing to Regulators. but now Sam bankman freed is in trouble and he had to crawl back to kiss the ring.
Reportedly binance valued the company and nothing so it was going to just take control of this company, in exchange for processing all these withdrawals. wow and then all of a sudden binance said, we’ve looked at fdx’s books and the whole is too much for us to patch. we’re gonna walk away what happened it’s ironic. Also because just a few months ago FDX was going around saving other bankrupt crypto companies.
For one of them Celsius this exact thing happened FDX looked at its books and said the hole is too big for us to patch. we’re gonna walk away so the same thing happened to FTX now and as for what that means for Sam bankman being freed. I think this Golden Boy when he falls like this it shows that perhaps there are very few credible actors in this space. and this would not be the last shoe to drop yeah yeah and what does all of this mean though for Sam bankman Freed? personal wealth well he is no longer a billionaire like most billionaires he doesn’t have a billion bucks in cash in the bank. all his money is represented in the value of his company.
FTX is basically worth nothing now right FTX filed for bankruptcy on Friday and there are reportedly going to be investigations looking into it what happened to the money. People deposited and invested in this platform. so it seems like part of the problem here is that this is still really an unregulated space so if you look at what happened in 2019. when quadriga CX The Exchange went under when its owner was announced dead that was a big story. where he was in India and it was this bit of a mystery of where he went and if he was actually dead that whole situation.
I think the only objective truth about it is that he was announced I guess there are lots of people saying he didn’t actually die. But that is a whole other story. so in the wake of that, there was a great wave of Regulation and enforcement in Canada. Our regulators came out with a lot stricter rules for exchanges and the OSC the Ontario Securities Commission has been particularly aggressive in enforcing all of those regulations. and I think we will definitely see more of that come. Because if you look at what’s happening in the U.S. Elizabeth Warren. A very noted crypto critic has said we need more aggressive enforcement and the head of the SEC. the Securities and Exchange Commission in the U.S. He has also had a history of being very hard on crypto. So no doubt he will seize upon this and be even harder and as we’ve read reports. FDX is already under investigation Ethan just just lastly here it’s been such a bad year for cryptocurrency in Bitcoin. Ether to the most popular cryptocurrencies are down 76 percent over the past year we’ve just been talking about.
This whole situation with FTX I guess the question is why are people still investing in it well I think firstly, I should say that this isn’t an issue with the main underlying commodity, it’s something with an individual company. It had done something bad it had done something foolish. That had an impact on the wider market but as we’ve seen with all the different shocks with crypto. it’s bigger than individual companies should people still be investing in cryptocurrencies.
I will never give people investment advice but I should say that don’t play with money that you’re not prepared to lose.
