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FT Cryptofinance: Crypto’s Lehman moment

Welcome to this week’s edition of the FT Cryptofinance newsletter. No prizes for guessing the topic this week.

Where to start after a week like this?

The spectacular unravelling of Sam Bankman-Fried’s crypto empire, from the FTX cryptocurrency exchange to Alameda Research, his proprietary trader, has been likened to the industry’s Lehman Brothers moment.

The latest to draw the comparison was Changpeng Zhao, chief executive of Binance, who said it was “probably an accurate analogy”.

One can see the parallels with the 2008 financial crisis. In March of that year Bear Stearns failed, setting off market instability, and after an uneasy summer, there came the cataclysm of Lehman.

Earlier in the year the crypto industry was shaken to its core when conventional tokens collapsed, stablecoins became unstable and companies such as Celsius Network went bankrupt. And again, after an uneasy summer of speculation, one of the biggest names in the industry is tottering.

But this year’s crypto crises teach us one particularly valuable lesson. When cracks in the industry appear — or indeed when chief executives “fuck up” — the unravelling can happen at light speed.

To give crypto its fair shake, traditional finance has an extensive back catalogue of rapid reversals, from Archegos, Enron, Amaranth, LTCM and MF Global. Like Hemingway’s aphorism, one can go bankrupt gradually, then suddenly.

But if we take this CoinDesk story as our starting point, FTX unravelled in less than 10 days.

Part of that can be put down to some transparency built into crypto markets. Onlookers witnessed FTT — the crypto token issued by FTX — collapsing in real time. They could follow the flow of funds thanks to the transparency of blockchains, the digital ledgers, which can exacerbate the charge for the exit.

The ready accessibility provided by social media also has an important role in spreading the drama, particularly Twitter. It was the medium through which both Bankman-Fried and Zhao announced their deal, and published the scant information we’ve had.

But it also highlights — again — that the industry’s claims to be decentralised are a myth. The links between FTX and Alameda show that large parts of the crypto industry remain opaque, interlinked and highly concentrated among a few individuals.

“Sam Bankman-Fried made a bunch of tweets that were probably not in his best interests through Twitter . . . do we really have to monitor tweets?” said one observer. “Is FTX’s transparency really about their chief executive issuing a stream of consciousness through some tweets? Where is the adult in the room?”

Playing out the drama on social media also highlights a broader public impact. As infamous as they are today, crypto’s previous failures, like Celsius and Three Arrows Capital, had nothing like the public profile FTX had. In less than four years, FTX emerged from nothing to become a household brand hitherto unseen in the industry.

Sports fans can’t miss it. The FTX logo has been plastered on Miami’s basketball stadium, Australian cricket grounds, baseball umpires’ uniforms and Tom Brady’s Instagram account. There was even a Super Bowl ad.

“A lot of the other collapses were still in a very technical box. Whereas this is Tom Brady, this is the Miami Heat,” Aidan Larkin, chief executive of crypto asset recovery platform Asset Reality, told me.

FTX hasn’t been alone in pursuing a big public branding campaign or latching on to sports stars. But this week will bleed into the public eye and inevitably tarnish the crypto brand.

“By using these celebrities it gave credibility to an industry, implying it was far more mature than it was,” Ilan Solot, co-head of digital assets at Marex Solutions, told me over the phone.

The irony is that it was the failure of Lehman, and the ensuing loss of confidence in the traditional banking system, that helped propel crypto’s popularity to this day.

In many ways the world is still coming to terms with the impact of Lehman. The US central bank has only just raised its key interest rate to its highest levels since 2008. It remains to be seen how long it will take to recover from FTX.

What’s your take on FTX’s financial crisis? As always, feel free to email me: scott.chipolina@ft.com

What we spotted …

  • The rush to distance oneself from Bankman-Fried is well and truly under way. Caroline Pham, commissioner at the Commodity Futures Trading Commission, quietly deleted a photo (yup, posted on Twitter) of her smiling alongside crypto’s former poster child back in April. I asked her why she did that, she said the post became distracting, and was “to make sure that the attention was back on the CFTC’s important work”. I’m re-upping it here so focus can shift back again to regulators’ relationships with crypto chiefs.

  • Inevitably, the uncertainty has hit crypto prices and comes exactly a year since they hit all-time highs. The industry’s flagship token, bitcoin, dipped to approximately $17,000 this week. That is a low point that hasn’t been reached since November 2020.

  • In other news (yes, there was other news), the US justice department secured a conviction in a historic crypto fraud case linked to Silk Road, the infamous dark web that is still synonymous with crypto for some. Read all about it here.

  • A few weeks ago this newsletter looked at the US sanctions imposed on crypto mixing service Tornado Cash for allegedly helping to launder billions of dollars worth of crypto. This week the US Treasury department redesignated Tornado, switching its justification for sanctions from supporting North Korean hackers to supporting the country’s weapons of mass destruction programme.

Soundbite of the week

So many to choose from this week but I’ll have to go with the most tone-deaf comments I’ve heard in ages. Su Zhu, one half of the master team behind collapsed crypto hedge fund Three Arrows Capital, decided to comment in public. Naturally, it was via Twitter.

Besides updating the world with what he’s been doing (catching up with friends, learning new languages, surfing), he also mentioned he was redeveloping spirituality and praying for those “who got hurt with me, those who want to hurt me, and those hurting in general”.

But clearly, he wanted to compare his plight to that of Bankman-Fried.

“There I was, surfing the wave of waves, next moment wiped out, board broken, rocks reefs everywhere. The sudden pain of business failure and loss of purpose, as a golden child of the industry + biz cycle more broadly, was as difficult as the ensuing ostracization and demonisation.”

Data mining: CZ, the king of crypto

When Binance agreed to buy FTX, I heard all around the industry that crypto “has a new king” in Changpeng “CZ” Zhao. It’s a little odd as the numbers tell you that he already ruled the roost. The chart shows how Binance had long left its rival FTX — which is primarily a derivatives exchange — trailing in the dust.



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