Sam Bankman-Fried, the now former CEO of FTX, encouraged the cryptocurrency exchange’s customers to purchase its own cryptocurrency, called the FTX Token.
Saul Loeb/AFP via Getty Images
hide title
change the subtitles
Saul Loeb/AFP via Getty Images
Sam Bankman-Fried, the now former CEO of FTX, encouraged the cryptocurrency exchange’s customers to purchase its own cryptocurrency, called the FTX Token.
Saul Loeb/AFP via Getty Images
Not long after starting the now bankrupt FTX, an exchange for trading cryptocurrencies, Sam Bankman-Fried and his co-founders decided to create their own virtual currency à la bitcoin.
“There’s no reason, if you’re in crypto, not to create tokens,” says Hilary Allen, a professor at the American University of Washington College of Law. “You can create arguments out of thin air.”
The FTX token, or FTT as it is more popularly known, debuted in 2019, and a few years later, the digital currency was valued at a high of nearly $80. Today, there are almost 250 million FTX Tokens in circulation.
Not bad for something that is just data.
Although it was a huge money maker for FTX and helped sustain Bankman-Fried’s hedge fund, in the end the FTX Token proved to be the company’s undoing.
After a CoinDesk article earlier this month raised questions about FTX’s finances, Changpeng Zhao, CEO of Binance, decided to offload his company’s substantial FTT holdings. This spooked investors, and as word spread, the value of the token rose.
Like airline miles, tokens rewarded customers but did little outside the company
The FTX token was part of an elaborate, reward-based marketing scheme to attract buyers.
“I think of it like airline miles,” says Ariel Zetlin-Jones, who teaches economics at Carnegie Mellon University. “Like loyalty points for using the exchange.”
Customers who bought FTT were able to trade in the company exchange with a discount. They can also use tokens as collateral. The company considered token holders as VIPs.
On its website, Bankman-Fried’s company referred to FTT as the “backbone of the FTX ecosystem.”
But customers didn’t know that those tens of millions of tokens weren’t widely distributed, which is essential to having a market that determines the price or value of any coin. In fact, many FTTs belonged to FTX and related companies, and Bankman-Fried’s hedge fund, Alameda Research.
Pouring money into a hedge fund by making risky bets
FTX fell apart quickly, and there is still much to learn about its stunning fall. But it is clear that Alameda Research used FTT to make speculative bets on other cryptocurrencies and complex financial products.
In other words, those “VIPs” handed over real money to buy a purely digital token from FTX, and everything was the basis for making risky and speculative investments.
The token acted “as the conduit through which money was flowing from cryptocurrency exchange FTX to Alameda Research,” says Eswar Prasad, author of The Future of Money: How the Digital Revolution Is Transforming Coins and Finance.
This inappropriate and improper practice escaped scrutiny in the largely unregulated world of crypto, which Securities and Exchange Commission Chairman Gary Gensler, Wall Street’s top cop, has compared to the “Wild West.”
“It was a very murky set of financial practices with no transparency, no investor protection and no financial guardrails of any kind,” says Prasad, who is also a professor of economics at Cornell University.
About a week ago, Binance’s Zhao announced on Twitter that his company was selling hundreds of millions of dollars of FTT. An old-fashioned bank run ensued, and soon, the tokens were practically worthless.
As part of Binance’s exit from FTX capital last year, Binance received approximately $2.1 billion equivalent in cash (BUSD and FTT). Due to recent revelations that have come to light, we have decided to liquidate any remaining FTTs on our books. 1/4
— CZ 🔶 Binance (@cz_binance) November 6, 2022
According to Prasad, this was to be expected.
“The moment there is the slightest whiff of concern about the token, the value of that token can disappear to virtually nothing,” Prasad said. “That’s what happened here.”
Today, FTT is still trading on several exchanges, even though FTX has begun Chapter 11 bankruptcy proceedings and Bankman-Fried is under legal and regulatory scrutiny in the United States and around the world.
FTT is now valued at less than $2, but surprisingly there is still a market for it.
As FTX crashed, its customers have had difficulty withdrawing their assets from the cryptocurrency exchange.
Leon Neal/Getty Images
hide title
change the subtitles
Leon Neal/Getty Images
As FTX crashed, its customers have had difficulty withdrawing their assets from the cryptocurrency exchange.
Leon Neal/Getty Images
“I think there’s an expectation that once you sift through all the embers from this fire, there will be some value left in the exchange,” Prasad says. “There will be some assets that will still remain that will have marginal value, and the token can be used to extract value from those assets.”
But, he added, he expects FTT’s value to drop even more in the coming days as we learn more about how a company that had been valued at more than $30 billion imploded so spectacularly.
Zetlin-Jones says there may be investors who are holding out hope that someone will buy FTX out of bankruptcy and then their tokens will be worth it again.
But he suggests there may be another reason why there is still a market for FTT.
“People buy trillion-dollar bills from Zimbabwe because it’s an anecdote and they might like them as collectibles,” says Zeitland-Jones. “Maybe FTT is the new collection we’ll be marveling at 100 years from now.”
