The Decibel - How FTX went from $32-billion to bankrupt in a week

Episode Date: November 14, 2022

Sam Bankman-Fried was seen by many as the golden boy of the cryptocurrency world. He was the CEO of major crypto exchange FTX, which at its peak was worth US$32-billion. He was known to hobnob with celebrities and work with Washington on the thorny issues of regulating crypto.But both his company and his reputation crumbled this week. Now people who had deposited their digital assets and cash on FTX are having issues getting their money back and investors in the platform have had to write off their investments as zero. Report on Business editor Ethan Lou explains the latest catastrophe in this very bad year for cryptocurrency.Questions? Comments? Ideas? Email us at [e-mail]

Hi, I'm Mainika Raman-Wilms, and you're listening to The Decibel. $32 billion. That's what the crypto exchange FTX was worth at its peak. But last week, the platform collapsed. And on Friday, the company filed for bankruptcy. Which 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 Liu is back on the show. He's an editor in The Globe's report on business

and the author of the book 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? Well, I was absolutely shocked because while this is a story that we have heard before with other collapsed crypto operations, those were by people from whom we never expected much.

But Sam Bankman Freed, the guy behind FTX, he was the golden boy. He pranced 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 you said he was supposed to be the lord and savior of crypto. 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. And this endeared himself to lots of people. And so figuratively, he was like this face of crypto. So my name is Sam. I graduated from MIT in 2014. After that, and literally during the downturn, which wasn't that long ago, it was just a few months ago, FTX was going around bailing out other bankrupt firms.

It was literally going around saving people. Wow. And Sam Bankman-Fried, who's now the former CEO of FTX, he resigned on Friday. He seems to, he looks like quite a character too. Can you give us a sense of, I guess, kind of his persona? Yeah, yeah. He definitely is this eccentric rich guy. He's very quirky. He, like, sleeps in a beanbag in his office. He's a billionaire, but that's how he spends his nights.

And he wears very casual clothes, just T-shirt and shorts, and he appears on stage with all these world leaders. And there's this quite famous picture, him and two supermodels on stage. And he was just there wearing his very casual clothes. And this kind of led people to kind of brand him as like a public face of the new crypto in a way. And he's got like kind of wild hair too. Like I think of the pictures I've seen of him, like he looks a little disheveled, I guess, is the word crypto in a way. And he's got like kind of wild hair too. Like I think of the pictures I've seen of him, like he looks a little disheveled, I guess is the word that

comes to mind. Yeah, yeah, yes. That disheveled tech bro look. Yes, exactly. I just want to really set up really what we're talking about here, the significance of what's been going on with FTX. Do we have a sense of how much of users' money has actually been lost here? Well, the company's worth $32 billion. And right now, lots of its investors wrote down their investment to zero. So $32 billion is gone. And yeah, as for how much of customers' money is gone, it's hard to say, but it's definitely a lot. And it's also not just customers' money because people have invested in FTX, so the Ontario Teachers 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 had 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 US that the pension plan, the teacher's pension plan actually put in that was first reported by our colleague Timur Durrani. So that sounds very significant. And let's just back up for a moment, Ethan. Can you just remind me, 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 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, FTX 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 pay people if they withdraw their funds all at once. It's what banks do. You deposit $100. The bank, I think in certain places, regulations say they have to keep 10%,

but the rest of that they lend out. And so did FTX have any reserves here? Do we know? The events have shown that they probably don't have much reserves. And this is a thing that people have complained about with respect to exchanges because regulations are so spotty. Hmm. Okay, so let's dig into what's been happening in the last week or so here with FTX. Where did things really start to go badly for FTX? So 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 is when people are trying to withdraw their

money at the same time, right? Yeah. And the thing that sparked this was a Coindesk report. This is a crypto industry news source. It reported that the sister company of FTX 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

co-mingling of funds, and it's badly. And people are thinking like the value of this company is trumped up. And so we better get our money out. So just help me understand 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 appeared to be co-mingling of funds. So it appeared that customers' deposits in FTX, they somehow were in Alameda Research.

And in finance, that is something you are not supposed to do. Yeah, it just made the operation seem shady and unreliable. We'll be back in a minute. Okay, so it sounds like this Coindesk report that you mentioned showing that Alameda Research, I guess the finances essentially that were at play here, this is what prompted people to lose faith in FTX then? Yes. And these things, I think they go in spirals. And so when a small group of people lose faith and they want to withdraw their money and news of this travels, other people hear of this and they lose faith as well and they want to withdraw their money. So it goes on and on. And FTX 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.

Okay. Okay. So there's two kind of interesting characters we were talking about here, Sam Beckman-Fridge, and then this guy, CZ. He's the head of a different crypto exchange called Binance. And you've actually interviewed CZ in the past, Ethan. What is he like? Aha, he is another interesting character. I think the crypto world is full of them. He was born in China, but he is a Canadian. And he had founded Binance outside of Canada. And Binance is under investigation by nearly every arm of the US

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 then, where people were trying to take out their funds, what actually happened? Sam Bankman-Fried 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 Bankman-Fried, he said, I'm going to buy out Binance's stake in FTX because I think Binance is too shady. And I want to be clean. I want to be pleasing to regulators. But now Sam Bankman-Fried is in trouble and he had to crawl back to kiss the ring. And 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. And then all of a sudden Binance said, we've looked at FTX's books and the hole is too much for us to patch. We're going to walk away. What had happened, it's ironic also because just a few months ago, FTX was going around saving other bankrupt crypto companies. And for one of them, Celsius, this exact thing happened. FTX looked at its books and said, the hole is too big for us to patch. We're going to walk away. So the same thing happened to FTX

now. And as for what that means for Sam Bankman 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. And what does all of this mean, though, for Sam Bankman-Fried's 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. And FTX filed for bankruptcy on Friday, and there are reportedly going to be investigations looking into what happened to the money that people deposited and invested into 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 the 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. Yeah, yeah. And I think that the only objective truth about it is that he was announced dead. 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 US, 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 US, 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, FTX is already under investigation. Ethan, just lastly here, it's been such a bad year for cryptocurrency. Bitcoin and

Ether, two of the most popular cryptocurrencies, are down 76% 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, and it had done something bad, it had done something foolish. And that has 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? Well, I will never give people investment advice. But I should say that don't play with money that you're not prepared to lose.

Okay. Ethan, thank you so much for taking the time to speak with me today. Oh, it's a great pleasure. Thank you for having me. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show.

Kasia Mihailovic is our senior producer, and Angela Pichenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.