CoinDesk Turns 10: 2022 – How Crypto Gods Turn Into Monsters

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2022 for crypto has been a hellish landscape of unprecedented disasters and the collapse of FTX was the culmination.

It was also unprecedented for CoinDesk. Unlike any previous moment of failure in crypto history, this time we found ourselves at the epicenter, as our reports triggered the events that unfolded.

This has resulted in a strange mix of bad and good news for CoinDesk itself. For one thing, Ian Allison and Tracy Wang’s coverage of FTX, including its blatant track record and chaotic corporate governance, earned CoinDesk its first prestigious journalistic award, the George Polk Award. CoinDesk has received more mainstream recognition than at any time in the company’s 10-year history.

This feature is part of our “CoinDesk Turns 10” series which looks back at landmark stories in crypto history. This feature on FTX, and other scandals, is our pick for 2022.

On the other hand, the tsunami wave triggered by the collapse of FTX shook just about every major crypto firm, including CoinDesks parent company DCG and its trading subsidiary Genesis. This outcome led directly to discussions about the potential sale of CoinDesks.

With big companies like Celsius, Terra/Luna and Three Arrows Capital collapsing, 2022 has been quite the year.

Prior to his fall from grace, Sam Bankman-Fried was one of the biggest names in crypto, a staple of the Washington DC lobbying circuit and a regular on the front pages of the financial press.

Sam Bankman-Fried was a bona fide celebrity in crypto, and once you hit that level of stardom, people kind of assume: yeah, he must be legit, says Tracy Wang, one of the reporters. award-winning CoinDesks who, along with Ian Allison, lead FTX crash coverage.

On November 2, 2022, Ian Allisons revealed weak balance sheets at FTX-affiliated trading firm Alameda Research, which triggered the bankruptcy of both companies. It turned out that Alameda, despite SBF’s repeated claims, was absolutely separate from FTX, relied heavily on FTX-created tokens and, more importantly, its unassuming user money.

All of this made FTX look like a big and reliable institution, and at first, CoinDesk’s findings about Alameda’s wrongdoings didn’t seem like something potentially cataclysmic, Allison says now. He didn’t feel like he was revealing anything so seismic. Even when the dominoes started falling, it looked like Sam could fix it, Wang said.

We thought it was interesting that a big part of Alameda’s balance sheet was the FTT token, but we didn’t expect the company to go to zero, Allison said.

Yet he did. Following the Allisons scoop, the CEO of Binance, FTX’s arch-rival, said he was going to sell all of the FTT held by Binance, driving its price down (FTT plunged from $25 to $1 in the space of two weeks) and raising fears of FTX insolvency. What followed was akin to a bank run on FTX: users withdrew $6 billion from FTX in 24 hours starting November 8.

To end the insult or injury, it turned out that FTX and Alameda had been run by a tight-knit group of SBF friends, sharing the same mansion in the Bahamas with no clear delineation between personal, professional and in love. This gang of kids in the Bahamas, as Tracy Wang said in her article, ruled FTX and Alameda as they saw fit, with little transparency and accountability.

Later, new FTX CEO John J. Ray III said in the bankruptcy proceedings that the FTX Group was tightly controlled by a small group of individuals who showed little interest in instituting an oversight framework. or appropriate control.

They mixed and abused company and customer funds, lied to third parties about their business, internally joked about their tendency to lose track of millions of dollars in assets and thus caused the FTX Group collapsed as quickly as it grew, Ray wrote.

We were shocked when FTX collapsed: wow, there was this fraud happening right in front of our eyes, and everything we knew about FTX was just a lie, Wang said. FTX staff members were as shocked as all of us, and many employees felt betrayed by Sam.

Although things looked bright for FTX even just before its fall, at least some market participants could sense something suspicious around Alameda’s operation, Allison says. It was no secret that Alameda did market making for FTX, he said, showing that the two companies, though technically separate, were at least working closely together.

Around September 2022, one of Allisons’ sources briefly mentioned that Alameda’s balance sheet is weaker than everyone thought. Allison started talking to more sources about it and soon enough one of those people who had obviously traded with Alameda provided more recent snapshots of the balance sheet, he says. Those snapshots revealed just how weak that balance sheet was and how intertwined Alameda and FTX were, Allison said.

It wasn’t entirely surprising in a way. The whole crypto market was at a very precarious point at that time, Allison said. The stock market crash and multiple crypto bankruptcies of 2022 were a tough hangover after the heady bull market of 2021, when ambitions and arrogance in the crypto-verse escalated.

At the time, founders of the (now bankrupt) fund Three Arrows Capital teased the public with promises of infinite crypto growth, or so-called supercycle, and stablecoin terraUSD (UST) founder Do Kwon (now under arrest) followed prominent VCs on Twitter.

The awakening was harsh. In May 2022, the algorithmic stablecoin Do Kwons UST lost its dollar peg and crashed, exposing the coin’s poor design and casting a shadow over algorithmic stablecoins as a concept. In July, Three Arrows Capital (3AC), which was betting heavily on UST and its sister cryptocurrency LUNA, filed for bankruptcy.

Soon it turned out that some major players in the crypto market were overly trusting and investing in 3AC’s success, so companies like Voyager, Genesis, BlockFi and Celsius also went underwater and filed the balance sheet. FTX was the latest addition to this list, but the most spectacular, given the fame and ambitions of Sam Bankman-Fried.

Wang says that before the crash, some people in the market could see that Alameda might also fall into the ongoing industry purge: Many people thought that Alameda might have been more indebted than they assumed and they were afraid it might have been another 3AC storyline, she said.

There was another, as Wang calls it, the orange flag (not bad enough to be red, but still worrisome, she explained): SBF’s effective altruism showed its larger-than-life ambitions and his drive to make FTX a success at all costs.

Sam was definitely an envelope pusher. This kind of risk-taking helped FTX achieve resounding success in a short time, until everything caught up with it, Wang said.

The consequences of FTX’s collapse were as important as its success, if not more so. This definitely frustrated regulators, who had spoken to SBF and, like almost everyone, assumed that FTX was a well-run and responsible company. As lobbyist Kristin Smith said onstage at this year’s Consensus Festival, after the failure of FTX, DC decision makers “realized they couldn’t tell a good guy from a bad guy.”

Some people have linked FTX’s collapse to the recent wave of crypto unbanking, when financial institutions the industry relied on Signature Bank, Silicone Value Bank, and Silvergate Bank were shut down by regulators, leaving crypto customers looking for alternatives.

The string of shutdowns, dubbed Operation Choke Point 2.0, was the Securities and Exchange Commission’s chemotherapy for a $14 billion cancer Ponzi scheme that hurt even healthy parts of the system, another Consensus speaker said, founder and CEO of the BCB Group, Oliver von Landsberg-Sadie.

FTX has made people pay attention to crypto even if they didn’t intend to before. Its failure caused them to question the merits of this industry before learning anything good about it. But the context of this story is also important.

Wang believes the FTX story was the real moment for CoinDesks to shine because over the years the newsroom had accumulated all the unique expertise needed to assess the situation when the stakes got so high. For any mainstream journalist, Alameda’s balance sheet might have meant nothing, because few people actually know what FTT, SRM, MAPS, OXY and FIDA were and why having these illiquid tokens dominating your balance sheet might be a bad idea.

It was CoinDesk [that broke the story] because we knew what to do with the balance sheet, she says.

And we also knew that FTX wasn’t the first giant to fail in crypto and won’t be the last, just check out more stories in the CoinDesks 10th Anniversary Series. And the death of companies does not mean the demise of the underlying technology and its revolutionary value to the world.

But the crypto-skeptics were right this time for a reason. How many crypto companies could actually operate under the same fragile terms as FTX and Alameda and immediately collapse if someone exposed their stock like CoinDesk did?

Allison laughs and says, Don’t ask!

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