Cryptos Plunge, Contagion Sweeps DeFi: Trying To Go To Heaven Together, End Up Going To Hell Together?

The Binance-FTX deal is now in doubt after revelations of a huge black hole and investigations by the SEC and CFTC.

By Wolf Richter for WOLF STREET.

So here we go again. Bitcoin plunged in the zip code of $15,000, $21,000 a few days ago and $68,000 a year ago. The FTX token, the native token of Bahamas-based crypto exchange FTX, founded by Sam Bankman-Fried, crashed 90% in two days. Cryptos at all levels are crushed.

FTX is in a solvency crisis. Users withdrew nearly all of the 20,000 Bitcoin (about $430 million at the time, now much less) from the Bahamas-based crypto exchange in just four days, according to Bloomberg, citing data from CryptoQuant. Yesterday, FTX has stopped crypto withdrawals.

Bankman-Fried also founded crypto-trading firm Alameda Research, and the whole mess became public a few days ago when CoinDesk reported that a quarter of Alameda Research’s holdings may consist of the FTX token, which is went into freefall, which triggered the solvency crisis. The Alameda Research website (https://www.alameda-research.com) has now been removed.

The SEC and the CFTC are investigating FTX.

The SEC and the Commodity Futures Trading Commission (CFTC) are investigating whether crypto exchange FTX.com mismanaged client funds following revelations of a solvency crisis, according to Bloombergciting three people familiar with the matter.

The SEC claims oversight of cryptos that it labels as securities. The CFTC, in terms of cryptos, can take enforcement action if it believes there is fraud or manipulation in the market underlying the derivatives, which it regulates. Both bodies supervise investment firms.

It turns out that the SEC has been investigating FTX US and its crypto lending activities for months, according to Bloomberg, citing two of the three people.

They are investigating FTC.com’s dealings with its US counterpart FTX US and Alameda Research, according to Bloomberg, citing two sources. Bloomberg:

In recent days, regulators have been asking for details about the ownership structure of FTX US and FTX.com, which caters to non-US customers, according to two of the people. Regulators are interested in any overlap between management and board structures, and the financial relationship between the two entities. The agencies also asked for details about whether client accounts were properly segregated and the makeup of the investor base on FTX.com, one of the people said.

The Binance deal is now in doubt: investigations and black hole.

The revelations on the extent of the investigations into FTX and Alameda Research come at a good time for Binance, the world’s largest crypto exchange, which had made a non-binding offer to buy FTX to “help cover the liquidity crisis”. and prevent further contagion in the DeFi space.

But Binance offered to buy FTX at a price that would eliminate FTX investors, including founder and CEO Sam Bankman-Fried, Softbank Vision Fund, Singaporean wealth fund Temasek, and Ontario Teachers’ Pension Plan.

These investigations cast new doubts on Binance’s willingness to move forward with the deal.

During the first hours of due diligence, Binance executives discovered a huge gap between liabilities and assets at FTX, possibly over $6 billion, according to Bloombergciting a source.

An immediate issue is how FTX priced its own FTX token and whether it should have been marked at a lower price, the person told Bloomberg.

The FTX token plunged 90% in two days, after Binance co-founder and CEO Changpeng Zhao said Binance would liquidate its own holdings of the FTX token, valued at the time at $530 million, after that it emerged that a quarter of Alameda Research holdings consisted of the FTX token.

Binance owned $530 million of its competitor FTX’s native token, and after finding out that Bankman-Fried’s other company was also in charge of the FTX token, Binance is getting cold feet?

Trying to go to heaven together, end up going to hell together?

It turns out that the fundamental principle of decentralized finance (DeFi) is that each company must be deeply interconnected with other companies, each holding the other’s token, and lending to the other, and bidding the tokens of each other, so that if a company goes to heaven, they all go to heaven together – which they did – and when a company goes to hell, they all go to hell together – which they do now. Allows a very gentle and effective contagion.

This was successfully tested by Voyager Digital, a crypto platform, crypto lender and crypto broker, which filed for bankruptcy on July 6, after crypto hedge fund Three Arrows Capital collapsed amid a huge leverage when cryptos plunged. Voyager had lent Three Arrows 15,250 bitcoins and 350 million USD coins ($650 million at the time), and Three Arrows went to hell and defaulted on that loan, and Voyager went to hell, and anyone who had fiat or crypto in an account at Voyager is now an unsecured creditor in a bankruptcy case.

Celsius Network, one of the biggest crypto lenders, also went to hell in July because it traded other cryptos it had borrowed from its users – similar to a bank but without any collateral – and then traded them. cryptos he bought plunged after terraUSD and luna was to hell, and Celsius could no longer repay loans to its users, and Celsius went to hell, and its users are now unsecured creditors in bankruptcy proceedings.

They’re holding all of each other’s tokens, and they’re bidding all of each other’s tokens at mind-boggling levels amid the gobbledygook theories of the new financial world, called DeFi, but now they want to sell those tokens to each other, and the prices collapse and exchanges, commerce, companies and lenders go to hell?

Binance is now unlikely to follow through on its takeover of FTX, according to Bloomberg, citing a person familiar with the matter. The non-binding letter of intent allows Binance to fully acquire FTX, buy parts of the assets, or walk away. The takeover doesn’t involve Alameda Research — which may have already stomped — and it doesn’t involve the separate US crypto exchange FTX.

Binance co-founder and CEO Changpeng Zhao told employees in a memo that he doesn’t have a “master plan” and that the collapse of FTX “isn’t good for anyone in the world.” industry”. DeFi players wanted to go to heaven together, and now they’re going hell together?

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Joseph E. Golightly