Terra/LUNA Stablecoin Collapse Also Killed FTX: Report
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Terra/LUNA Stablecoin Collapse Also Killed FTX: Report

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Blockchain evidence shows that FTX’s FTT token combined with trading losses both hid and worsened the financial condition of Sam Bankman-Fried’s empire.

Terra/LUNA Stablecoin Collapse Also Killed FTX: Report

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Blockchain analytics firm Nansen found evidence on the blockchain that FTX’s FTT token combined with trading losses to both hide and worsen the financial condition of Sam Bankman-Fried’s empire.

The sudden failure of Sam Bankman-Fried’s FTX exchange and Alameda Research trading firm were really just the latest and largest of the string of crypto companies that went under as a result of the Terra/LUNA stablecoin collapse, a new analysis argues.

More than that, the lengthy report blockchain analytics firm Nansen released on Nov. 16 argues that the shockingly sudden collapse into insolvency of Bankman-Fried’s empire was “perhaps inevitable” ever since the two-token stablecoin ecosystem’s arbitrage-based dollar peg failed, wiping out $48 billion in value and setting off a string of bankruptcies in over-leveraged crypto firms.

Still, the report makes a strong argument that, the second-largest global crypto exchange, FTX, its smaller American cousin FTX, and Alameda did not collapse because of bad bets, like many of the crypto lenders that went bankrupt after Terra/LUNA took down crypto hedge fund Three Arrows Capital (3AC).

Instead, Nansen makes an argument that malfeasance brought the companies down, not bad luck or poor management. While its conclusions — reached solely from on-chain analysis — are never portrayed as conclusive, they do fit right in with comments made by the restructuring expert brought in to guide the 130-odd companies in Bankman-Fried’s FTX Group through bankruptcy.

Not Just Mistakes

New CEO John Ray III — who guided Enron through bankruptcy liquidation — told a bankruptcy court on Nov. 17 that  “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” at FTX.

Along with a litany list of carelessness and intermingling of two companies that should have been separated by a strong firewall, Ray cited software specifically designed to “conceal the misuse of customer funds.”

He also said Alameda was secretly exempted from having its FTX derivatives trades auto-liquidated. That was, according to one crypto lawyer on Twitter, “literally God mode” — referring to video game settings in which a player’s character cannot die.

Nansen pointed to rumors that “FTX was only really started to raise funds for Alameda and the two colluded from the very beginning.”

That is where the report digs deep into the FTT tokens that FTX created and that Alameda profited from and eventually used to prop up a multi-billion-dollar hole in its balance sheet.

Among the “pessimistic interpretations” of on-chain data — Nansen’s analysts were very careful not to make accusations — is that during the FTT initial coin offering (ICO) “Alameda profited off the ICO participants by selling the tokens before other investors’ tokens were unlocked and buying them back cheaper later on to return to FTX.”

The Wheels Come Off

When CoinDesk revealed that assets of at least $5 billion worth of FTT  made a huge chunk of Alameda’s balance sheet illiquid, FTT holders began selling off and pulling funds off of FTX. When Binance CEO Changpeng “CZ” Zhao announced that his company — a former FTX investor — was going to sell off its $584 million in FTT tokens, that became a run.

The problem was that with the circulating supply of FTT fairly low, Nansen said, small sales could have a big effect on price. And FTX effectively controlled 80% of the FTT supply — although it was supposed to have no more than half.

“Since both Alameda and FTX held the majority of FTT supply, if one entity is forced to sell its FTT holdings, then the other entity may consequently take a huge hit to its balance sheet,” the report added.

With billions of dollars of its customers’ funds having been secretly loaned to Alameda as post-Terra/LUNA losses mounted — and Nansen pours through transaction records to find this “a plausible case” — and the only collateral increasingly illiquid FTT, FTX had to halt withdrawals and the wheels came off.

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