In this Unchained Podcast, the Host, Laura Shin, is joined by Jesse Powell, CoFounder of Kraken FX and Kevin Zhou, CoFounder of Galois Capital, to talk about FTX’s collapse, what were the issues that led to it, self custody as a result, regulations and more.
Read our notes to find out more.
Root cause of the FTX collapse
FTX core team were mainly traders and did not have good business management.
Inexperienced and had a huge amount of work for their team size.
Lack of financial accounting and controls.
Even though they were crypto natives, they did not have first-hand experience with big financial events like Mt Gox.
Another very possible cause is just fraud itself.
Kevin
Had spoken to Alameda about accounting systems, before FTX existed.
Alameda had spent some time for records reconciliation, but was not very stringent about discrepancies.
Red flags
Jesse had issues with some regulatory stuff with Sam Bankman-Fried (SBF) previously regarding a bill with problematic language.
Kraken notified their users about it to contact their government representatives.
FTX however used their contacts in DC and negotiated backroom deals instead.
FTX thought they knew better than everyone else without learning past lessons from others.
Galois funds on FTX
As a US-based business, they kept getting kicked off international exchanges.
Started to concentrate more trading and funds on FTX as a result.
FTX also had the ability to list many types of coins.
A lot of red flags in hindsight.
SBF was the golden child of crypto and regulators seemed to be fine with him and FTX too.
False sense of security.
Large position sizes that were hard to unwind.
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Missing monies
Declaration by the new CEO, John Ray mentions that corporate funds were used to purchase homes and other personal items for employees and advisors.
Alameda had loaned billions of money to SBF, director of engineering Nishad Singh, Co-CEO Ryan Salame and others.
Alameda had also invested billions in venture firms.
When Alameda first started on Bitmex leaderboard with top 10 positions, the environment was much easier.
Not many institutional and sophisticated players back then.
More high frequency trading firms started coming in and squeezing out the slower players.
Kevin
SBF had a Co-Founder called Tara McCully who wanted to start Lantern Ventures for riskier investments.
Internal disagreement happened due to the team member’s stance on risks.
As a result, only higher risk takers remained in FTX.
Drug usage were a critical part of their issues.
Investments in Solana and fully diluted value coins were possibly intended to be used as collaterals.
If the accounts were solid, a tweet by Binance’s CZ would not have caused the token to spiral so badly.
LUNA was most likely the start of their liquidity crunch.
Accounting practices
Funds sent to FTX were listed straight to Alameda on the financial records.
A lot of sloppiness from past experiences with Alameda.
FTX employees were looking for other vehicles to invest in as SBF did not allow investments into FTX due to bookkeeping efforts.
Bank accounts were hard for crypto exchanges to get in the past but should have been much easier by FTX’s era.
Consequences of the collapse
Self-custody should be a better practice even if you don’t have a large amount of crypto since its mostly cost-free.
Overall there is a net withdrawal from exchanges based on chain activity since the recent implosions.
However, people will forget soon and return to old practices after a while.
People generally expect hacks and exploits but not the collapse of FTX, especially with all the media, political and celebrity relationships that SBF had.
Bitcoiners’ celebration
FTX collapse did not vindicate anyone.
The collapse had nothing to do with BTC, DeFi or other coins, it was a financial fraud.
Many victims, including bitcoiners and non-crypto holders.
Regulations
Regulations forced many US customers to go offshore instead of being able to trade in US-based exchanges.
Offshore companies like FTX International had better yields and trading freedom.
Futures trading and tokens that were like securities were not allowed.
Domestic companies are unable to compete within the regulation constraints.
No available licenses to be applied for locally.
Regulators need to update domestic laws.
Venture Capitalists (VCs)
VCs should have known what was happening behind the scenes as they had to be familiar with SBF to get into the early rounds.
They also marked prices very high due to the low float.
Standard playbook for Web2 VCs.
VCs perhaps wanted to preserve relationships with SBF and did not reveal critical information earlier.
Media biases towards SBF
Lots of media pieces that are positive towards SBF (e.g. New york times piece)
NYT article author had spent time with SBF in Bahamas previously, might have already formed an impression earlier.
Stamps of approval in previous media (e.g Forbes cover, Sequoia Capital relationship) regarding SBF may be affecting current media’s attitude towards SBF.
SBF’s capital and power may have scared small whistleblowers or publishers to want to release (e.g Harvey Weinstein scandal took decades to come out).
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