Eterna's Insights - November 2022

The Fall of SBF

The flagship news of the month was the rapid collapse of Sam Bankman-Fried’s (SBF) FTX and its sister company, a hedge fund called Alameda Research. The collapse began on November 2nd, when CoinDesk reported on the balance sheet of Alameda Research. The documents revealed that Alameda’s largest holding was FTT, FTX’s native exchange token, which highlighted the tight relationship between the two firms. To further complicate issues, Alameda had used FTT as collateral to raise billions of further debt. This immediately raised questions and concerns about a liquidity crunch for both FTX and Alameda Research. Following these revelations, CZ, the founder of Binance, announced that Binance will sell all of its FTT tokens, which equated to roughly $2.1bn at the time.

The CEO of Alameda Research, Caroline Ellison, then tweeted that Alameda would buy Binance’s FTT tokens for $22. Even with this, the sentiment and belief in FTT had already cratered and the token began to fall drastically, losing 75% of its value in under 24 hours. On the same day (November 8th) as this collapse, Binance announced that they had signed a non-binding LOI to fully acquire FTX to protect its users, dependent on a due diligence check of FTX’s financials. On November 9th, in what was a very quick turnaround, Binance announced that it was walking away from the deal due to the latest news reports regarding FTX’s mishandling of customer funds and the alleged US agency investigations. On November 11th, FTX, FTX.US, Alameda Research, and many subsidiaries filed for Chapter 11 bankruptcy in the US. SBF resigned as CEO and was replaced by John J. Ray III, who famously oversaw the liquidation of Enron. To make matters worse, FTX and FTX.US were then hacked for over $450m.

The fallout from the FTX collapse has been devastating for the industry. Crypto lender, BlockFi, who had very close ties with FTX, announced that it is filing for bankruptcy protection, explaining it had “significant exposure” to FTX. A trading partner of FTX, Genesis Global Capital, halted customer withdrawals due to a liquidity crisis. Their derivatives business has approximately $175m of assets in FTX. Genesis has since hired a restructuring advisor as it explores options including potential bankruptcy. Another firm that has been affected by Genesis’s liquidity crisis is crypto exchange, Gemini. Gemini halted user withdrawals from their Earn product, which was partially serviced by funds borrowed from Genesis and Genesis’s parent company, DCG. According to reports, Genesis and DCG owe users of Gemini Earn $900m.

Binance, the Industry Saviours?

In light of the FTX collapse, Binance announced the Industry Recovery Initiative to help promising crypto projects that are facing financial distress. Initially, Binance will commit $1bn to the fund with an intent to increase the amount to $2bn in the near future if the need arises. In addition, Jump Crypto, Polygon Ventures, Aptos Labs, Animoca Brands, GSR, Kronos, and Brooker group have also committed to participating with an initial aggregate commitment of $50m. So far, they have received 150 applications from companies seeking support.

The Positive

Putting aside the negative news, Nike continued its endeavour into Web3 with the launch of .SWOOSH, a platform geared towards building community around the company’s digital wearables. It will become a resource for Web3 education, a platform to buy and trade digital collectibles, and will also allow users to create their own digital collectibles. The issuer of USDC, Circle, announced merchants can now accept USDC through Apple Pay. This should be very beneficial for crypto-native businesses as it will make it easier to accepts payments while not excluding customers that do not use crypto.

Institutional Belief

Regardless of the fallouts which are having a short-term impact on the industry, institutions have continued flooding into the crypto space. Fidelity officially opened retail crypto trading accounts after announcing a waitlist earlier in the month. The accounts offer commission-free Bitcoin and Ether trading. The world’s largest publicly traded hedge fund, Man Group, announced plans to launch a cryptocurrency exclusive fund. The fund strategy is being led by portfolio manager Andre Rzym and will only be approved for investors once the company assesses it for counterparty risks. Circle has begun moving the reserve for its stablecoin USDC into a dedicated fund set up by BlackRock, called the Circle Reserve Fund. The fund is a money market fund managed by BlackRock and registered with the SEC. All of Circle’s short term Treasury assets will be moved into the fund, while the cash reserve (approx. 20%) will remain in partner banks, in order for customers to more easily redeem their USDC.

The Move to Regulation

The EU has delayed vote on its Market in Crypto Assets legislation until February. While the outline of the legislation was approved in June and the final text published in October, it still needs to be signed off by both lawmakers and the national governments that make up the EU’s council. A previous plan for the vote to be held in December was abandoned given the length and complexity of the text. The Brazilian Chamber of Deputies approved a bill regulating the crypto industry. The bill establishes a new crime of fraud involving virtual assets. It also stipulates the creation of a “virtual service provider” license, which exchanges and other crypto firms would have to obtain to operate. The bill still requires the approval of the executive branch to enter into law.