But first things first. What happened?
Satoshi Nakamoto's white paper, wherein he invented Bitcoin based on a decentralized technology, came about in November 2008 as a direct response to the near-collapse of Wall Street. Now the crypto industry is having its very own popcorn or "Lehman moment," namely the collapse of the fourth largest crypto exchange FTX.
FTX was one of the leading crypto exchanges until last week, founded by U.S. American Sam Bankman-Fried, also simply known as "SBF". FTX with registered seat in the Bahamas was valued at a whopping $32 billion earlier this year. Blackrock and SoftBank were among the investors. Supermodel Gisele Bündchen and her ex-husband, famed quarterback Tom Brady, also invested and promoted FTX as ambassadors. FTX had an excellent reputation.
SBF, in the final hours of decline, tried to find a last minute solution with its arch-rival Binance, founded by Zhao "CZ" Changpen, one of the richest people in the crypto world. This failed.
The big whodunit had previously played out on Twitter. It gave the impression that the two alpha males were both just all about transparent communication. The reality is probably different: The public exchange of blows was driven by too much testosterone and an almost 18-month-long ego-power tussle.
For many, the events of the last two weeks are an Oscar-worthy drama, for others a bad - although lavishly produced - movie that confirms all crypto prejudices.
A drama in three acts
Act I: FTX did a funding round in 2019, CZ got in and bought a 20% stake in FTX. This SBF later bought back from him because the two billionaires just didn't really became best friends. CZ was compensated with FTX tokens, the in-house utility token used in the FTX ecosystem.
Act II. A group company of FTX, Alameda Research, apparently received loans from FTX and entered into risk transactions with them. This is based on leaked account books of Alameda Research. These were presumably secured with the FTX token. CZ's announcement on Twitter that it wanted to sell all of its directly or indirectly held FTX stocks led to great excitement in the market, because this much was clear, this would cause the price of the FTX token to fall.
Act III. the announcement and the emerging drop in the price of the FTX token put both Alameda and FTX in distress, because Alameda Research had to back the loans with further collateral, while FTX was threatened with a complete default of the receivables and could lead to a liquidity shortage of FTX, thus not being able to (fully) repay customer funds. This fear in turn developed into a self-fulfilling prophecy, a so-called "bank run". Many customers demanded the return of their funds deposited with FTX. Within a short time FTX announced that withdrawals were no longer possible.
Summary and current state of affairs
On the global crypto exchange chessboard, SBF and CZ are central figures. Their respective crypto exchanges top the leaderboards: FTX is No. 4 and Binance is No. 1. Many people have now lost a lot of money. The behavior of the players involved and their inept management will certainly keep many audit firms, law firms, regulators, criminal authorities and courts busy. Many details are still open and once again the question arises: How could this happen? One thing is already certain: crypto winter was yesterday. Today, we are on the cosmic one-way street of a "heavily regulated black hole that will inevitably swallow us with potentially eternal darkness and freezing frost." Traditional and regulated financial service providers will be pleased. The FTX collapse will go down in history as a sad milestone and will startle regulators worldwide. If not already done (Switzerland and the EU are already far ahead with their regulations), the regulatory screws will be tightened in many countries.
As FTX implodes and the crypto sector goes from winter to the potential eternal darkness and icy freeze of a heavily regulated black hole, financial services boomers are feeling some schadenfreude.
Our 5 take-aways
- Less testosterone is more. SBF and CZ have done immense damage in their mutual vying. It feels as if the two have continued the showdown taking place between the two state political heads of the US and China on their crypto-world chessboard. Is it just us or does it smell like in a men's locker room?
- DeFi is better than CeFi (for explanation, see box) At least in terms of transparency. Because even if opinions differ when it comes to other factors, there is absolute transparency with genuine DeFi services. The blockchain platforms, which are publicly visible, make it possible to verify both the code that supports the solution's smart contracts and the transactions it processes. That means there's less uncertainty about what's going on behind the scenes.
- Regulated CeFi is better than unregulated CeFi. There is a reason why banks and other financial institutions are subject to a strict set of regulations. Our regulators are concerned with protecting customers and what is known as systemic protection. Since the financial crisis of 2008/2009, financial markets have been subject to increasingly strict regulation. Even if one or the other rule may have overshot the mark, the FTX collapse now clearly shows that similar transactions with comparable risks should also be subject to comparable rules (same business same risks same rules).
- Know whom to trust. Do not trust anyone lightly. Especially not if that person is based in the Bahamas and is not subject to the same regulatory supervision as your local bank around the corner. Look closely, inform yourself.
- Diversify your portfolio. Look at different asset classes. If you want to invest in crypto, it is best to choose a solution with its own wallet. If that is too complex and complicated for you, then at least choose a crypto exchange where you know that it is subject to a bank-like supervisory system.
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DeFi stands for decentralized finance and refers to the decentralized protocols, platforms and services that contrast with traditional financial infrastructures such as banks and otherwise government-supervised financial institutions. DeFi eliminates the fees that banks and other financial institutions charge for the use of their services. Users:inside keep their money in a secure digital wallet, can transfer FIAT money in minutes. Anyone with an Internet connection can use DeFi.
CeFi stands for centralized finance and represents a compromise between DeFi and traditional financial infrastructures through centralized platforms that provide financial services to users of digital assets.