HomeBlogFinance‘Lightning fast’: Liquidity crisis hits Sam Bankman-Fried’s crypto empire

‘Lightning fast’: Liquidity crisis hits Sam Bankman-Fried’s crypto empire

Billionaire Sam Bankman-Fried’s sudden fall from crypto “saviour” to rescue recipient has dealt a severe blow to the fragile confidence of the $1tn digital asset market, leaving traders and investors shocked at the speed of the near-collapse of one of its pillars.

FTX and Alameda Research, Bankman-Fried’s crypto exchange and trading firm, were a week ago considered some of the most reliable stars of the crypto market. Bankman-Fried had enhanced his reputation by supporting struggling peers such as lender BlockFi at the height of the summer crypto crisis. That earned him the nickname of “crypto Pierpont Morgan” — a reference to the banker who stepped in to halt a bank run in 1907.

But on Tuesday the 30-year-old, whose FTX exchange was valued at $32bn at the start of the year, was forced to turn to a rival for a bailout as fears for the financial health of Alameda led to an unsustainable rush of customers demanding their deposits back from the marketplace.

The liquidity crunch marked a spectacular reversal of fortune for Bankman-Fried, who in less than four years had rocketed from a relatively unknown high-frequency trader to become one of the best-known faces in the crypto industry and its de facto chief spokesperson in Washington. His paper fortune ballooned to an estimated $24bn only six months ago.

Bankman-Fried, son of professors at Stanford Law School, founded FTX in 2019 and built the company’s profile by splashing millions on a high-profile media campaign, which included buying the naming rights to the NBA’s Miami Heat arena — now FTX Arena — and appearing in glossy Vogue magazine advertisements with supermodel Gisele Bündchen.

He also clinched the support of major investors including SoftBank, Tiger Global, BlackRock and Ontario Teachers’ Pension Plan, which poured money into FTX.

A humbled Bankman-Fried on Tuesday appealed to rival crypto exchange Binance, which within hours inked a deal to buy the exchange and guarantee customers funds. He held a “very straightforward” all-hands meeting on Tuesday, said a person familiar with the matter.

“It all went lightning fast,” the person said. “He said: this is what’s happening and it’s done.”

News of the deal came as a shock even to veteran crypto traders and executives. Bankman-Fried said customers would receive all their money back but it would take “a bit” of time.

“This is a historical moment . . . a bit of a ‘what the fuck’ moment,” said Pascal Gauthier, chief executive of digital wallet provider Ledger. “It shows that no one is too big to fail. FTX seemed untouchable.”

Binance chief executive Changpeng Zhao sharpened fears surrounding FTX on Sunday when he said his crypto exchange decided to sell its stash of FTT — a crypto token issued by FTX — because of “recent revelations that have come to light”.

The tweet followed a CoinDesk report that Alameda held billions of FTT tokens on its balance sheet, swelling its assets against $8bn of liabilities.

A senior executive at a crypto trading firm said: “It’s almost like a company using their equity as collateral on a loan. And you would never do that because it is so linked to your health as a business. When you most need the collateral to do its job, it starts to become worthless.”

Changpeng Zhao at a conference
Changpeng Zhao’s Binance has agreed a deal to bail out chief rival FTX © Reuters

By Tuesday evening London time, the value of the exchange’s FTT token fell from roughly $22 to about $5 in 24 hours, a collapse of more than 70 per cent.

The proposed Binance bailout of FTX also throws into question rescue deals Bankman-Fried negotiated with companies in the crypto industry stricken by the collapse in token prices this year, which wiped two-thirds from the total market cap of digital assets.

R3 managing director Charley Cooper said: “Until yesterday, FTX was still revered as a saviour to many parts of the ecosystem in the wake of the terra/luna collapse but, by Tuesday afternoon, they were swallowed up by one of their earliest investors.”

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