If you're hearing the word "crypto" tossed around more than usual, there's a good reason. The fall of cryptocurrency exchange company FTX has garnered quite the buzz—even amongst those who still aren't quite sure how to use Bitcoin in a sentence (understandable). So if you've found yourself lost in the crash of this crypto-company, which was valued at a whopping $32 billion earlier this year, worry not. We asked a crypto scholar Bill Maurer, PhD, a cultural anthropologist at UC Irvine, to break down all the FAQs on FTX—including what it may mean for your crypto holdings.
Below, his answers to our most-pressing questions.
Let's start with the basics. What is FTX?
FTX is a crypto exchange and trading platform based in the Bahamas and created by Sam Bankman-Fried [aka "SBF"]. He's known more broadly in the crypto world for taking part in the "Effective Altruism" movement, a philanthropic trend wherein founders (largely in the tech world) pledge to give away all the money they make in their lifetimes to impact positive change in the world. That do-good premise was this veneer around FTX and this guy, SBF.
FTX itself was almost like a bank—it allowed you to buy and hold cryptocurrency and deposit your crypto and state-issued currency as well. You can do that with a lot of crypto exchanges, but the next thing that FTX allowed you to do was to use your deposits as collateral and to borrow against them. In other words, it was both a trading platform and a lending platform.
For example, you could deposit Bitcoin and then borrow against your Bitcoin to buy Ethereum (the native cryptocurrency of the Ethereum blockchain). Because Bitcoin costs more than Ethereum, you were able to make the bet that the value of Ethereum was going to rise enough that you could pay off that loan. And then, hey, presto, you've got tons more money.
Why the Bahamas?
In the United States, you would need to be a brokerage firm or a bank to run FTX, both of which are highly regulated entities. So that's likely why FTX is in the Bahamas.
Editor's note: The Bahamas are so attractive to business owners like SBF because of their "tax haven" status. A tax haven is "a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment," according to Investopedia.
Okay, and what is Alameda Research, the other company SBF owns?
Alameda is an investment company based on this margin trading idea of getting loans to make big investments in other cryptocurrencies to earn a profit to then pay off the loans to then get more loans to then make big investments to then earn a profit.
Editor's note: The TL;DR is that FTX (founded in 2019) is a crypto exchange company and Alameda Research (founded in 2017) is its affiliated trading firm. According to The New York Times, SBF founded FTX to fund Alameda. And thus, the two companies have always had a codependent relationship.
Okay, now catch us up on the FTX crash. What happened?
The problem really started when the so-called "crypto winter" happened in early November. A "crypto winter" refers to a long time period of declining cryptocurrency prices. You can read more about the causes of this year's crypto winter here.
The crypto winter led to the broad sell-off of all kinds of cryptocurrencies and declining prices in crypto. As a result, lenders to Alameda were like, "Okay, we think that you need to pay our loans back now, because there's no way that the crypto that you're buying with our money is going to be making any money."
Basically, the creditors came calling. And when the creditors came calling—and here's where it gets a little bit murky—it seems like SBF was using customers' funds from FTX to bail Alameda out. So somehow Alameda had tons of FTT (the FTX token), and was borrowing against its FTT holdings to pay off its debts. But with the falling prices, including the fall of price in FTT, it looks like SBF just took deposits from the exchange to keep Alameda afloat.
So Coin Desk, a crypto media outlet, actually got a hold of Alameda's balance sheet in early November, and started raising the alarm. Saying, "hey, it looks like most of the stuff on its balance sheet is FTT. Where did that come from? FTT is losing value. And then the founder of another exchange, which is named Binance, basically was like, "what the hell" and started selling all of his FTT, which led to a big drop in FTT price.
After that, everybody with their money in FTX was like, "we need to get our money out of FTX." But guess what? It wasn't there anymore. That's what led FTX to file for bankruptcy on November 11. So it's gonna be a while before we know exactly what is going on because there was a lot of funny accounting. There was a lot of shuttling back and forth between FTX and Alameda. There was a lot of FTT just being created somehow and given to Alameda. And now, there are all these customers who can't access their funds.
So, is the FTX fall likely to affect the larger financial market?
I would say no. This seems relatively contained. It might have a ripple effect for the wider crypto market only because I think a lot of regulators are going to be asking what's really going on with these cryptocurrency exchanges. Like, can we look under the hood and see what you're all really doing?
We're at a moment where the head of the SEC [the U.S. Securities and Exchange Commission], Gary Gensler, is very keen to build a better regulatory system around crypto and blockchain. So I think this is going to put the wind in the sails of those who want greater regulation.
Now, of course, would greater regulation have helped here? No, because it's the Bahamas—but it's definitely putting the whole industry on notice.
I think that there are big portions of the crypto world that want regulation. They don't necessarily like it, but they want certainty, clarity, and, ultimately, they want trust. And this is a major hit to trust, right? So if [crypto businesses] can say somewhere down the line, "Hey, we're a regulated entity and here's our filing with the SEC, then probably more people will start to trust it again."
The government does some very nice things [when it comes to banking]. It gives us deposit insurance if we're in a regulated bank or credit union. We don't have that for cryptocurrency exchanges. So if you're, if you're imagining that your money in crypto is in a bank account, you need to think again because it's not. There's no federal insurance to protect you if it goes if things go wrong.
What is your advice to founders who have crypto holdings—or whose businesses rely on crypto?
I would reevaluate your holdings, reevaluate your strategy, and really make sure you understand where your money is—and how you can get it out if you need to. Things like the FTX crash can happen because it's a largely unregulated space or a space that's regulated in a way where there's still so much wiggle room. It's a place where people can just use different words for the same thing and all of a sudden not be subject to the SEC [guidelines].
Editor's note: This is a developing story.