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Reading: FTX: Collateral Damage
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Blockbytes > Blog > Article > News > FTX: Collateral Damage
CryptoNews

FTX: Collateral Damage

Charles
Last updated: 2022/11/18 at 7:41 PM
Charles Published November 18, 2022
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The past two weeks have been among the most eventful in crypto’s short history. The fall of FTX marked one of most catastrophic corporate blow ups of all time, the aftershock of which will likely be felt for months to come, if not years. 

The FTXplosion has already sent the first round of shockwaves rippling through the system, the result of which is mass uncertainty around the solvency of almost every centralized exchange in crypto. Proof of reserves (POR) has become the focus for users and investors, as centralized exchanges scramble to produce favorable numbers in efforts to assure customers that funds really are safu. But as we’ve seen with the now unemployed Sam Bankman-Fried, talk is cheap, and those at the helm will say anything in order to save themselves from falling victim to the same fate.

So how much collateral damage is there?

Damage Control

On November 8, despite SBF’s now deleted tweets claiming that “everything was fine”, FTX paused customer withdrawals. Following the withdrawal halt, several large exchanges engaged in crowd control in an attempt to ease the minds of their users and mitigate potential rumors of liquidity issues or insolvency…

Nov. 9

Coinbase makes claims of financial strength: 

Given the recent conversation around liquidity struggles, we wanted to provide clarity around these challenges and reiterate how Coinbase is different: https://t.co/ErABYrc0yN

— Coinbase (@coinbase) November 8, 2022

Tether, the same:

FTX, Black Swans, and Tether's Continued Stabilityhttps://t.co/ICR8YVGSTZ

— Tether (@Tether_to) November 9, 2022

Jeremy Allaire of Circle claims “no material exposure”:

2/ Circle has no material exposure to FTX and Alameda. FTX has been a customer of Circle Payment APIs for the past 18 months, providing card and ACH services for customer transactions. Circle's crypto payments beta product uses FTX and other exchanges, for BTC/ETH liquidity.

— Jeremy Allaire (@jerallaire) November 9, 2022

Genesis Trading also alleges limited exposure to FTX, and reported $7M in losses after hedging against market volatility:

We want to provide an update on where things currently stand with our lending business. In anticipation of the extreme market volatility yesterday, we hedged and sold collateral resulting in a total loss of ~$7M across all counterparties, including Alameda.

— Genesis (@GenesisTrading) November 9, 2022

Crypto.com dismisses accusations of financial trouble and claims minimal exposure to FTX. Promises to release an audited POR publicly:

We share the belief that it should be necessary for crypto platforms to publicly share proof of reserves and https://t.co/pFc4Pz9nFR will be publishing our audited proof of reserves.

— Kris | Crypto.com (@kris) November 10, 2022

The Block reports that Multicoin Capital had 10% of their assets under management on FTX and the funds are now stuck.

Amber group claims no exposure to FTT or Alameda, oh, except that 10% of their funds are stuck on FTX:

7) We have no exposure to Alameda or $FTT. But similar to most trading firms, we have been an active trading participant on FTX. While we have significantly reduced our exposure over the course of the week, we still have withdrawals that have yet to be processed.

— Amber Group (@ambergroup_io) November 9, 2022

Wintermute states that it has funds on FTX but the amount is ‘not significant’:

5/ We do have remaining funds on FTX, and while this is not ideal, the amount is within our risk tolerances and does not have a significant impact on our overall financial position.

— Wintermute (@wintermute_t) November 9, 2022

Galaxy Digital reported a Q3 loss of $68.1M on Nov. 9, revealing the loss was due to $76.8M FTX exposure.

Sequoia Capital, a large early investor in FTX, discloses a $213M loss on FTX.

Here is the note we sent to our LPs in GGFIII regarding FTX. pic.twitter.com/Cgp1Yxk1pz

— Sequoia Capital (@sequoia) November 10, 2022

Nexo announces that they had withdrawn all funds prior to the halt, reports no further exposure:

.@Nexo has $0 net exposure to FTX/Alameda.
As a conservative institution with stringent risk controls @Nexo has safeguarded *all* funds by withdrawing its entire balances from the exchange over the past few days, as evidenced by on-chain data:https://t.co/py8fzBDKbP
1/

— Nexo (@Nexo) November 8, 2022

Kraken claims they are not affected in ‘any material way’, and reposts the release of a full audited POR to the public:

🚨Check if the exchange you’re using undergoes Proof of Reserves audits.

ICYMI: Kraken is committed to regular audits – enabling you to verify the balances you hold on our exchange are backed by real assets 🤝

Don’t trust, verify your balance now ⤵️
https://t.co/sI0TkgLTHq

— Kraken Exchange (@krakenfx) November 8, 2022

Nov. 10

Tether freezes $46M worth of USDT held by FTX following law enforcement requests.

Binance releases a statement on transparency, shows balances of all hot and cold wallets under management. Binance plans to release a full audited report in the coming weeks.

As part of #Binance's ongoing commitment to transparency, we are sharing details of our hot and cold wallet addresses.

Stay tuned as we will publish a Merkle tree proof of funds within the next few weeks.

More details here ⤵️

— Binance (@binance) November 10, 2022

Genesis resurfaces a day later to add to their previous claims of limited exposure to FTX. Turns out the damage was less than minimal, unless your definition of minimal is $175M…

As part of our goal in providing transparency around this week’s market events, the Genesis derivatives business currently has ~$175M in locked funds in our FTX trading account. This does not impact our market-making activities.

— Genesis (@GenesisTrading) November 10, 2022

The bad news continued as BlockFi halted withdrawals, stating that they could not continue operations as usual:

pic.twitter.com/zNF1uP6evl

— BlockFi (@BlockFi) November 11, 2022

It was this day that FTX US also halted withdrawals, further highlighting the fact that Twitter promises are not always the full truth; talk is cheap.

Nov. 12

Kraken freezes accounts owned by FTX and Alameda executives:

Kraken has spoken with law enforcement regarding a handful of accounts owned by the bankrupt FTX Group, Alameda Research and their executives. Those accounts have been frozen to protect their creditors.

Other Kraken clients are not affected. Kraken maintains full reserves.

— Kraken Exchange (@krakenfx) November 13, 2022

Nov. 13

Binance announces recovery fund to assist projects affected by the collapse:

To reduce further cascading negative effects of FTX, Binance is forming an industry recovery fund, to help projects who are otherwise strong, but in a liquidity crisis. More details to come soon. In the meantime, please contact Binance Labs if you think you qualify. 1/2

— CZ 🔶 Binance (@cz_binance) November 14, 2022

Nov. 14

Ikigai discloses that they had a “large majority” of their assets on FTX, and was only able to withdraw a portion of them:

Unfortunately, I have some pretty bad news to share. Last week Ikigai was caught up in the FTX collapse. We had a large majority of the hedge fund’s total assets on FTX. By the time we went to withdraw Monday mrng, we got very little out. We’re now stuck alongside everyone else.

— Travis Kling (@Travis_Kling) November 14, 2022

BlockFi pauses withdrawals, stating that they “would not be able to operate as usual”.

Nov. 16

Genesis halts withdrawals after previous claims of ‘limited exposure’, yet another example of attempts to quell customer doubts in order to save face before revoking access to funds:

Our #1 priority is to serve our clients and preserve their assets. Therefore, in consultation with our professional financial advisors and counsel, we have taken the difficult decision to temporarily suspend redemptions and new loan originations in the lending business.

— Genesis (@GenesisTrading) November 16, 2022

Genesis is a large crypto lending institution owned by a parent corporation Digital Currency Group (DCG). As per their Q3 2022 report, Genesis had roughly $2.8B in outstanding loans at the end of the quarter. The halt of withdrawals is of obvious significance considering their massive loan issuance to other crypto institutions. One direct result revealed itself just hours later, when lending partner Gemini announced a withdrawal pause for their Earn program”

1/6 We are aware that Genesis Global Capital, LLC (Genesis) — the lending partner of the Earn program — has paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days. https://t.co/9e48pF3Ymn

— Gemini (@Gemini) November 16, 2022

According to the Wall Street Journal, Genesis sought an emergency loan of $1B from investors before halting withdrawals. Their parent company DCG has since injected $140M into the lending firm, a strange amount considering Genesis’ locked funds on FTX amount to “only” $35M more…

Coinbase doubles down on contagion fear mitigation, stating: “zero exposure to Genesis”.

2/ We won’t comment on every event in crypto, but for the sake of clarity: Coinbase has zero exposure to Genesis Trading.

— Coinbase (@coinbase) November 16, 2022

Sino Capital, an early investor in FTX, discloses a ‘mid 7-figure’ loss on their FTX investments:

pic.twitter.com/SMkYQmDXRK

— Sino Global Capital (@SinoGlobalCap) November 15, 2022

Crypto lender Vauld apparently has $10M worth of assets stuck on FTX, The Block reported. 

Final Thoughts

Troubling information surrounding FTX’s bankruptcy surfaces hourly. The events I’ve covered happened only within the span of a week, and it’s still unclear how much collateral damage there will be following such an epic fall from “grace”. What is becoming clear is the amount of disingenuous assurances from major exchanges and lenders prior to locking user funds due to glaring liquidity issues. As a user, you must protect yourself from such calamities by taking proactive measures and not relying on empty promises, even if they come straight from a horse’s mouth. Horses are liars anyhow…

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