Capital markets News

Did a reference to Terra’s LUNA crypto spark a mini-run on FTX exchange?


The crypto exchange FTX run by Sam Bankman-Fried, experienced significant withdrawals over the weekend. Bankman-Fried acknowledged the activity on Twitter yesterday. The main trigger was likely a series of tweets by Binance CEO Changpeng Zhao (CZ). He didn’t just say he planned to sell Binance’s FTT token (the FTX token) holdings but that it was “post-exit risk management, learning from LUNA.” The mere mention of Terra’s LUNA coin – the one that ignited the crypto crash in May – seems to have exacerbated the matter.

What happened?

Acknowledging the withdrawals, yesterday Bankman-Fried wrote on Twitter, “We’ve already processed billions of dollars of deposits/withdrawals today; we’ll keep going… We’re hitting node rate capacity, will keep going.”

He continued, “We’re grateful to those who stay; and when this blows over we’ll welcome everyone else back.”

Last week, Coindesk published some snippets from the balance sheet of Alameda Research, the crypto market-making firm that Bankman-Fried also controls. It showed that Alameda held $14.6 billion in assets at the end of June, but a significant proportion related to FTX’s token, FTT, including $3.66 billion in unlocked FTT and $2.16 billion in FTT collateral.

The news initially didn’t have much impact, with the FTT token price drifting down by just over 5% but it was almost back to where it started by Saturday.

Yesterday Binance’s CZ tweeted that it was selling its FTT holdings which Binance acquired when it converted its equity stake in FTX to $2.1 billion in stablecoins and FTT. He said he expected the liquidation to take a few months, and Alameda Research’s CEO Caroline Ellison responded on Twitter that Alameda would buy the lot off him for $22, a price below the value at the time.

As part of his announcement, CZ tweeted “Binance always encourages collaboration between industry players. Regarding any speculation as to whether this is a move against a competitor, it is not. Our industry is in its nascency and every time a project publicly fails it hurts every user and every platform.”

However, after using the ‘fail’ word above, a tweet a few hours later referenced LUNA, the coin of the failed Terra stablecoin project. “Liquidating our FTT is just post-exit risk management, learning from LUNA. We gave support before, but we won’t pretend to make love after divorce. We are not against anyone. But we won’t support people who lobby against other industry players behind their backs. Onwards,” tweeted CZ. 

The takeaways

  • runs can be exacerbated by users watching activity in real-time
  • the real question should be about FTX’s (rather than Alameda’s) balance sheet
  • if exchanges were more regulated, would all of this have been on Twitter?
  • it’s not the first social media triggered mini run
  • is there a Musk effect here?

The transparency enabled by blockchain has pros and cons. One analytics firm Cryptoquant was tweeting charts showing the drawdown in FTX’s stablecoin reserves and the spike in Ethereum withdrawal volumes yesterday. This is prima facie evidence that a mini run is happening and is the sort of thing that can cause a stampede.

One of the challenges is that some less informed retail investors misinterpret the data. So yes, people were heading for the exits at FTX yesterday. But the level of its stablecoin reserves is unimportant if FTX has plenty of capital. The stablecoin reserves can be quickly topped up (and were) by selling other cryptos to buy more stablecoins which in turn fund redemptions.

That leads to the real questions that should be asked. The health of Alameda will have more of an impact on the broader crypto community because it uses leverage. Although Alameda’s CEO says that its leverage is considerably less because the appetite for credit has dropped following the crypto crash

If you run with CZ’s LUNA statement for a moment, what’s the worst thing that can happen, and what would the impact be? For starters, the FTT token has dropped to $22, a decline of 15% and the same price level as two weeks ago, before the recent storm. The price drop so far is not dramatic.

So, in what ways are Alameda and FTX intertwined other than the token? What are the intercompany balances between them? Or, putting it another way, does Alameda owe FTX money?

And looking at FTX, the real question is how much FTT it has on its balance sheet. And does its capital base exceed the value of its own FTT holdings? If FTX has sufficient capital, then even if the value of the FTT token went to zero – which currently looks unlikely – FTX would be fine. Update: in a tweet Bankman-Fried says FTX has a more than billion in excess cash.

More takeaways on regulation

Despite Bankman-Fried’s proclamation that “though it slows us down sometimes on product, we’re highly regulated,” most highly regulated financial institutions would beg to differ and repeatedly demand a level playing field with crypto exchanges. For one thing, highly regulated firms have prescribed capital buffers, circling back to the point about FTX’s capital needing to be more than the value of (its own) FTT holdings.

And if crypto exchanges were more highly regulated, one or two of these tweets might not have been made out of concern for being censured by the regulator. To be clear, an objective statement by Binance that it is selling its FTT holdings is fine.

FTX is not the first to experience a mini run as a result of social media. Just over a month ago, Credit Suisse suffered something similar. However, the difference was the Credit Suisse trigger was mainly retail speculation. Here it might have been the late night follow-up tweet from CZ referencing LUNA.

And one has to wonder about the Musk effect. Musk is comfortable running certain aspects of his business in a very public manner. But it’s a different story if the company’s sector is financial.

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