FTX Fiasco Highlights the Ponzi Nature of Modern Banking and the London Gold Market


    by Ronan Manly, BullionStar:

    The recent collapse of crypto exchange FTX and associated crypto trading firm Alemada Research has shell-shocked the financial world while wiping out the assets of FTX and Alameda customers and dragging down investments in the wider crypto space.

    It has also, in revealing a cesspit of corporate misconduct and fraud, brought the concepts of Ponzi schemes and Fractional Reserve schemes firmly to the fore of public consciousness, while inviting parallels with other parts of the financial system, not least, comparisons to the modern banking system and the paper gold market.

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    Since the news flow about the FTX debacle is seemingly non-stop (and increasingly more bizarre with each passing day), there is plenty of coverage on the web about what triggered FTX’s downfall, so I won’t repeat it all here, save for some points on the nature of FTX-Alameda holdings and transactions, their fraudulent and Ponzi nature, and their total lack of transparency.

    FTX – Alameda Interconnected

    FTX is/was a centralized cryptocurrency exchange, which was founded in 2019, and which entered into bankruptcy proceedings on 11 November 2022. FTX was founded by Sam Bankman-Fried (SBF) and Gary Wang, and during its meteoric rise, was at one stage the third largest cryptocurrency exchange in the world. SBF was CEO of FTX. The native token of the FTX exchange was/is FTT (in the same way, for example, that BNB is the native token of Binance, and KCS is the native token of Kucoin).

    Alameda Research, which was also co-founded by Sam Bankman-Fried (in 2017), is/was a crypto quant trading firm as well as an investor in the crypto sector. Alameda Research also filed for bankruptcy on 11 November 2022. Caroline Ellison was CEO of Alameda at the time of the bankruptcy filing.

    On 2 November 2022, an article by website Coindesk highlighted that a large chuck of the assets on Alameda’s balance sheet were in the form of the FTT token, a token which FTX creates out of thin air, and the implication then based on this balance sheet composition was that Alameda was insolvent due to losses that it had suffered on crypto investments from earlier in 2022 (possibly from 3AC and Luna losses during springtime), losses which it had up to then hidden, and that due to this the FTX exchange had been propping up Alameda with loans which were collateralized with the very token (FTT) which FTX had created itself (which is in itself a scam since you as a lender can’t accept collateral of something which you created yourself).

    After the Coindesk article, Binance, a competitor crypto exchange, which was holdings US$ 500 million of FTT, then moved quickly to sell it’s FTT stake, which caused the FTT price to plummet, and which caused panic from FTX clients over the next week as they moved to withdraw their funds and coins from FTX, which was a sort of ‘bank run’ on FTX, despite the fact that FTX was not a bank. For example, on Sunday 6 November, FTX customers are said to have (by SBF) withdrawn $5 billion from the FTX platform.

    Chapter 11 – on November 11th

    During this time, FTX tried to raise funds from outside investors, but failed, including a stalled offer to buy the FTX exchange from Binance. Given the lack of options in fund raising, about 130 companies in the ‘FTX’ and ‘Alameda’ empire (across 4 silos of FTX.com, Alameda, FTX US, and a Ventures silo) then all simultaneously filed for bankruptcy on 11 November.  So that’s Chapter 11 on 11/11 for all the numerologists. At this point SBF resigned as CEO of FTX. The bankruptcy was filed in a Delaware court. See here.

    The new CEO of FTX appointed at the time of bankruptcy filing is insolvency specialist and attorney, John J. Ray. In the FTX Bankruptcy filing, Ray said:

    Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.

    From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

    Ray also said that the objectives of the Chapter 11 bankruptcy filings included a) implementation of controls in areas such as accounting, audit, cash management, and risk management, which “did not exist or did not exist to an appropriate degree, prior to my appointment”, b) create transparency by deliberate investigation into FTX-Alameda, c) provide “Asset Protection & Recovery” in terms of “the location and security of property of the estate, a substantial portion of which may be missing or stolen”.

    Ray’s team somehow assembled or were given balance sheets of the 4 groups of companies which filed for bankruptcy, but he literally didn’t believe any of the figures, since in the filing, Ray states on multiple occasions that since their balance sheets were:

    “produced while the Debtors were controlled by Mr. Bankman-FriedI do not have confidence in [them], and the information therein may not be correct as of the date stated.”

    Balance Sheets – From Bad to Worse

    Then on 12 November, the Financial Times got its hands on another sort of balance sheet, this time an amateur Excel page printout of an FTX balance sheet, dated 10 November, that Sam Bankman-Fried had cobbled together and had circulated during the final fundraising attempt.

    This 1 pager XLS worksheet (see here) which was created by SBF himself, claims that the FTX exchange had customer liabilities of US $ 8.86 billion but at the same time only had liquid assets of US$ 900 million (and more than half of this $900 million was equity stock of the brokerage Robinhood (i.e. stock in ticker HOOD)). So that straight away was an $8 billion deficit of liabilities compared to liquid assets.

    The XLS worksheet also listed ‘less liquid’ and ‘illiquid’ assets, the ‘less liquid’ assets being a majority of tokens created by FTX such as the tokens FTT, Serum (SRM) and another token MAPS – all of which were created out of thin air.

    FTX’s liabilities of $8.86 billion included about 1.4 billion of Bitcoin (BTC), yet according to the spreadsheet, FTX actually held no BTC whatsoever. So FTX was pretending that it had bought Bitcoin for its customers, when there was no BTC at all held by FTX. In this instance, not only was there no 1:1 backing of coins for claims, there appears to have been no backing.

    For a neat visual of SBF’s FTX ‘balance sheet’, see the visual graphic created by Visual Capitalist, dated 15 November here.

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