There are at least three different angles to the SBF/FTX/Alameda collapse.

• The most obvious one is that the crypto industry as a whole is still standing on shaky foundations and there are at least some Ponzi-style elements in some parts of it. See, for example, this Odd-Lots podcast with SBF himself and Matt Levine from April this year, which compares crypto yield farming as a ‘black box’, without an economic purpose, where people keep putting money “and then it goes to infinity and everyone makes money”. This note is not on this as the topic has already been profoundly explored in the media space.
• Then there is the political angle which is related to SBF personally contributing substantial amounts of money in both Democrat and Republican primaries but having a clear agenda for the 2024 presidential election.
• Finally, there is the technical angle in which there is this great ‘battle’ between centralised and decentralised banking/finance, tradfi vs defi. The rest of the note will dwell on these two, with an emphasis on the latter.

Bottom line is that it seems SBF was trying to move FTX more towards traditional finance and thus make it more stable and bullet proof, which ironically links all these three different angles together. Which begs the question, did someone want SBF down and out? And while going down, can FTX take the whole crypto industry in the gutter?

Many comments in the media regarding the collapse of FTX focus on the supposedly shambolic due diligence process on SBF/FTX/Alameda by some venerated names in the private equity, hedge fund and pension fund industry. Unfortunately, the likes of “SBF was playing video games in the due diligence process meetings” (the original Sequoia note was taken down before this was ready to be published, but a copy can be found here: https://archive.ph/xy4MR) are taken hugely out of context and despite the shortcomings and Ponzi-like structures in parts of what FTX was doing (see above, yield farming), the vision and ideas SBF was projecting did perhaps deserve the money thrown at them. Their execution, however, left a lot to be desired.

SBF himself was a big political donor. Even though he had contributed most recently to both Democrat and Republican causes, he had said he would spend up to a $1Bn “to help influence the 2024 US presidential election campaigns”($1Bn is a humongous amount of money in politics; the largest single donors currently are Sheldon and Miriam Adelson, to the Republican Party, with $218m in 2020), specifically if he were to bankroll the person running against former President Donald Trump.

It seems SBF was not a fan of Bitcoin as a payment network because its proof of work system does not allow scaling up. FTX US exchange was much more tradfi than defi, for example. SBF had testified before the House Financial Services Committee and had slightly different crypto regulation ideas from the other market participants there.

This stance by SBF did not win him many sympathizers in the crypto community. For example, see here main rival CZ/Binance: “We won’t support people who lobby against other industry players behind their backs”.

From that point of view, the collapse of FTX is somewhat intriguing. On November 2, Coindesk leaked supposedly Alameda’s balance sheet which showed that, “Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto”.

Even though Coindesk admitted that “[I]t is conceivable the document represents just part of Alameda”, and even though Alameda’s CEO Caroline Ellison later tweeted that this leaked balance sheet was indeed not complete and there were $10Bn of assets not listed there, the damage was already done and competitors were starting to pile on – for example, Binance sold more than $500m of FTT tokens.  

SBF wanted to incorporate the best features of rivals Coinbase, a basic US-regulated crypto exchange, and Binance, an unregulated exchange which offers much more advanced transactions. In the process he wanted to become filthy rich but only so that he can give away all his fortune in the spirit of effective altruism: “The math … means that if one’s goal is to optimize one’s life for doing good, often most good can be done by choosing to make the most money possible—in order to give it all away.”

Also in the process, did SBF ‘anger’ some very important people in politics and in business who eventually did their best to take him down? Conspiracy theories aside, the tale of the collapse of FTX is one which we have seen over and over again in banking and finance: unregulated entities which manage other people’s money cannot last forever: without the explicit backing of a lender of last resort they eventually fold when trust suddenly evaporates. If that is indeed the case, what is the future of decentralised finance?

And if that is indeed the case (no lender of last resort), can FTX take the whole industry down with it? It may certainly do. Everything in crypto land is ‘tethered’. Both literally (courtesy of USDT being the most widely adopted stable coin) and figuratively (as seen lately by the collapse of so many crypto-related firms). So, it is unlikely we will get to the bottom of this before all this gets fully ‘untethered’.

While Tether was quick to point out that it has no exposure to Alameda/FTX, it’s not a given that the opposite exposure does not exist to the point that it could affect USDT itself. According to this article (arguably from a year ago, I wonder how current it is now) two firms account for the majority of Tether/USDT ever received. Alameda is at the top with about 30% of the total.

And according to SBF himself today, “Alameda Research is winding down trading”, which means that they may be unloading a good portion of their USDT stack. In fact, it seems the selling has already started. And this selling may be just part of the normal process of unwinding Alameda Research, or it may have other ulterior motives as well. SBF closed his Twitter thread today, November 10, with this: